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www.datamonitor.com Datamonitor America 245 Fifth Avenue 4th Floor New York, NY 10016 US t: +1 212 686 7400 f: +1 646 365 3362 e: [email protected]
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Healthcare expenditure is growing fast driven by aging populations, an increasing prevalence of chronic diseases,
expanding government healthcare coverage, and use of expensive drugs. Also, as a result of the economic downturn,
healthcare funding is under scrutiny by governments in developed markets which are looking to pay down their debts.
Consequently, healthcare reforms in EU and Japan focus on containing costs, without impacting quality of service. Ongoing
measures include pricing and reimbursement cuts, bolstering generic usage, as well as other cost cutting tools, with the
outcome largely negative for branded pharma.
In the US, although the health reform law may well extend health insurance coverage and increase government
involvement in healthcare, costs are expected to escalate. Also in the short-term, discounts and rebates will negatively
impact US sales affecting companies with a strong US focus the most. Furthermore, pharmacovigilance issues and the
need for greater transparency in terms of regulatory processes are straining the relationship between regulators and
pharma.
However, reforms in the emerging markets which concentrate on improving the quality and coverage of healthcare provide
opportunities for pharma, particularly generics manufacturers. Nevertheless, as healthcare access expands and quality
improves, funding pressures increase ultimately leading to the introduction of cost-containment measures.
Coverage: the US, Japan, France, Germany, Italy, Spain, the UK, Australia, Brazil, Russia, India, and China
Pharmaceutical Key Trends 2011 – Healthcare System and Drug Regulatory Overview Cost-containment and regulatory pressures intensify
Reference Code: HC00062-004
Publication Date: 03/2011
Page 2
About Datamonitor Healthcare
Pharmaceutical Key Trends 2011 – Healthcare System and Drug Regulatory Overview HC00062-004/Published 03/2011
© Datamonitor. This report is a licensed product and is not to be photocopied Page 2
ABOUT DATAMONITOR HEALTHCARE
Datamonitor Healthcare provides a total business solution to the pharmaceutical and healthcare industries. Its services
reflect its expertise in therapeutic, strategic and company market analysis and competitive intelligence. For more details of
Datamonitor Healthcare’s syndicated and customized products and services, please refer to the Appendix or contact:
Bornadata (Bonnie) Bain, PhD, Director of Research and Analysis, Tel: +1 617 722 4606, [email protected]
About the Healthcare Strategic Analysis Team
Datamonitor’s Strategic Analysis team, led by Alistair Sinclair, includes both analysts and senior analysts. The team’s
educational backgrounds span a variety of science- and business-based degrees (BSc, MSc, and PhD) from universities in
the UK and abroad, in addition to prior experience in bioinformatics, pharmaceutical consulting and medical market
research.
The team focuses upon providing in-depth strategic insight through syndicated modules covering the following key areas:
• Socioeconomic Analysis – Analysis of a country’s population demographics, economic wealth, disease
burden, level of industrialization, and political structure.
• Regulatory Analysis – Insight into a country’s healthcare system, drug regulation, drug pricing, drug
reimbursement, and intellectual property position.
• Sales Analysis – Sales data regarding the size of a country’s prescription pharmaceutical market (segmented
by retail vs. hospital setting, Anatomical Therapeutic Chemical classification, leading prescription drugs, and by
leading internationally and domestically headquartered companies.
• Expiry Analysis – Assesses a country’s generics and biosimilars landscape in terms of regulatory issues, level
of penetration, key players, and degree of brand erosion following patent expiry.
• Industry Infrastructure Analysis – Overview of geography-specific R&D and manufacturing infrastructure for
the leading pharmaceutical companies operating in a given country, including key metrics (employees,
expenditure, operational sites) and geography-specific M&A analysis.
Countries profiled in 2011 include: the US, Canada, Japan, Australia France, Germany, Italy, Spain, the UK, Turkey Brazil,
Mexico, Russia, India, China, South Korea.
Together with the Pharmaceutical Key Trends 2011 modules, the Strategic Analysis team will be producing more than new
80 modules in 2011, together with updates in line with Datamonitor Healthcare's Modular & Continuous production platform.
For inquiries about the content of this report, please contact Alistair Sinclair at [email protected]
Page 3
Executive Summary
Pharmaceutical Key Trends 2011 – Healthcare System and Drug Regulatory Overview HC00062-004/Published 03/2011
© Datamonitor. This report is a licensed product and is not to be photocopied Page 3
EXECUTIVE SUMMARY
Introduction
Healthcare expenditure is growing fast driven by aging populations, an increasing prevalence of chronic diseases,
expanding government healthcare coverage, and use of expensive drugs. Also, as a result of the economic downturn,
healthcare funding is under scrutiny by governments in developed markets which are looking to pay down their debts.
Consequently, healthcare reforms in EU and Japan focus on containing costs, without impacting quality of service. Ongoing
measures include pricing and reimbursement cuts, bolstering generic usage, as well as other cost cutting tools, with the
outcome largely negative for branded pharma.
In the US, although the health reform law may well extend health insurance coverage and increase government
involvement in healthcare, costs are expected to escalate. Also in the short-term, discounts and rebates will negatively
impact US sales affecting companies with a strong US focus the most. Furthermore, pharmacovigilance issues and the
need for greater transparency in terms of regulatory processes are straining the relationship between regulators and
pharma.
However, reforms in the emerging markets which concentrate on improving the quality and coverage of healthcare provide
opportunities for pharma, particularly generics manufacturers. Nevertheless, as healthcare access expands and quality
improves, funding pressures increase ultimately leading to the introduction of cost-containment measures.
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Executive Summary
Pharmaceutical Key Trends 2011 – Healthcare System and Drug Regulatory Overview HC00062-004/Published 03/2011
© Datamonitor. This report is a licensed product and is not to be photocopied Page 4
Strategic scoping and focus
This report provides an overview of the healthcare and drug regulatory systems for the 12 major markets (the US, Japan,
France, Germany, Italy, Spain, the UK, Australia, Brazil, Russia, India, and China). It includes an overview of healthcare
expenditure, insight into the recent and on going healthcare reforms, assesses the regulatory issues impacting pharma,
and examines the key pricing and reimbursement controls across the 12 major markets.
The report has been structured as follows:
• An executive summary.
• An overview of healthcare expenditure in the 12 major markets.
• Insight into the major reforms of healthcare systems in the developed and emerging markets.
• An assessment of the regulatory issues that are affecting global pharma markets.
• Analysis of the key pricing and reimbursement controls that are affecting pharma, including price and
reimbursement cuts, cost effectiveness analysis, risk sharing, and price negotiation.
• The bibliography
N.B. This report is produced in two parts:
1. Word document: contains key conclusions and a summary of the current and future market opportunities and
threats, supported by strategic case studies to provide insight into potential market strategies;
2. PowerPoint executive presentation: shares Datamonitor’s key insight into the market with supporting data and
recommendations.
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Executive Summary
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© Datamonitor. This report is a licensed product and is not to be photocopied Page 5
Key findings
Key growth drivers and resistors facing healthcare payers and pharma
• Aging populations, the growing prevalence of chronic disease, greater use of expensive treatments, and expanding
public healthcare coverage in markets such as the US are stretching existing healthcare resources. Healthcare
payers are also feeling the impact of the global economic downturn through reduced funding via taxation in
response to rising unemployment.
• As a result, payers are introducing a number of cost-containment strategies such as reducing healthcare budgets
(at least in real terms), implementing pricing and reimbursement cuts, and bolstering generic uptake. These
measures, together with the increasingly tough regulatory environment, all have a negative impact on the pharma
industry.
• Furthermore, branded pharma is set to lose approximately $100bn in sales due to the patent cliff and resultant
generic erosion of branded sales during 2010–15, while the industry is also feeling the affect of the global economic
downturn which has restricted out-of-pocket spend on healthcare in countries such as the US.
• However, the industry is implementing a number of strategies to drive sales and profitability going forward: product
innovation, diversification and cost-containment (Figure 1).
Figure 1: Key growth drivers and resistors facing healthcare payers and pharma
1 = Growing patient populations stretches existing healthcare resources2 = Economic downturn puts pressure on payers through reduced funding via taxation as a result of growing unemployment3 = Economic downturn results in less out-of-pocket spend on healthcare (e.g. in the US), thereby impacting Pharma4 = The patent cliff and erosion of branded drug sales directly impact Pharma5 = Cost-containment strategies implemented by payers negatively impact Pharma* = Sales loss for the top 50 global pharma companies in the US, Japan, France, Germany, Italy, Spain and the UK
A B = A has a negative impact on B
Global economic downturn Patent cliff
1 2 3 4
5
• Aging patient populations• Growing prevalence of chronic diseases• Greater use of expensive treatments• Expanding public healthcare coverage
Rising healthcare costs
Cost-containment and regulatory pressures intensify
• Reducing healthcare budget • Pricing and reimbursement cuts• Driving generic uptake• Growing regulatory scrutiny
• Governments look to pay down debts
• Reduced out-of-pocket spend
• $100bn* in lost branded sales due to generic erosion during 2010–14
• Biosimilar uptake set to accelerate
Pharma’s strategic responsesStrategies to drive profitability• Innovation• Diversification• Cost savings
Source: Datamonitor D A T A M O N I T O R
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Executive Summary
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© Datamonitor. This report is a licensed product and is not to be photocopied Page 6
Healthcare expenditure
• The proportion of public contribution to healthcare is greater in the developed markets (74%) as compared to the
emerging markets (46%).
• US healthcare expenditure as a proportion of gross domestic product (GDP) is the highest of the 12 markets
analyzed, and as a result of the recently passed US healthcare reform law, the government will foot an even larger
proportion of the total healthcare bill in the future.
• While in Europe, governments have begun to implement austerity measures as a result of the recession that will
see a reduction (in real terms) in healthcare expenditure.
• Although the BRIC countries (Brazil, Russia, India, and China) have lower health expenditures as a proportion of
GDP relative to the developed markets, public healthcare spend is increasing as governments make healthcare a
bigger priority.
Healthcare reforms
• In response to the growing healthcare pressures facing governments and payers, numerous countries are
reforming their healthcare systems, ultimately to provide better treatment and to contain costs.
• The main aim of healthcare reforms in Japan and the EU are to contain costs, without impacting quality of service.
Governments in these markets are therefore turning to solutions such as pricing and reimbursement cuts, driving
up generic usage, insurance and hospital reforms, and decentralization strategies. However, the outcome of such
reforms ultimately has a negative impact on branded pharma.
• Reforms in the emerging concentrate on improving the quality and coverage of healthcare, funded through greater
government expenditure as well as through growing private insurance coverage. Such reforms provide
opportunities for pharma, particularly for generics manufacturers. Nevertheless, as healthcare access expands and
quality improves, funding pressures increase, leading to the introduction of cost-containment.
• The exception however is the US, where although the health reform law may well result in extended health
insurance coverage and increase government involvement in healthcare, costs are expected to escalate.
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Executive Summary
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Figure 2 summarizes the positive, negative, and neutral impacts which reforms have on the pharmaceutical industry.
Figure 2: Healthcare reforms can have positive or negative effects on pharmaceutical sales
Reforms seen as negative Reforms seen as positiveReforms seen as neutral
US Healthcare Reform• Pharma: short-term sales
dip followed by mid-term sales growth – increase in discounts and rebates but larger sales volume from more insured people…
• …but long-term negative impact – due to intensifying cost-containment pressures
• Private insurers: mixed impact – more customers overall but harsher competitive environment
• Individuals: mixed impact –more affordable insurance for low earners but cost may be transferred to others
• Reduction in healthcare expenditure – Strategies include hospital reforms in order to contain costs and insurance reforms to transfer greater healthcare costs onto individuals to rein in spending
• Pricing and reimbursement cuts –Have an adverse effect on pharma sales.
• Driving generic uptake –Driving greater erosion of off-patent branded drug sales
• Expanding healthcare services – Building more hospitals, improving local access to healthcare, and improving the quality of medical training
• Improving regulatory structure – Reforms intended to strengthen pharmaceutical regulation and to align with international standards
• Expanding health insurance – Improving access to poorer often rural communities
Source: Datamonitor D A T A M O N I T O R
Regulatory issues
• Pharmacovigilance issues and the need for greater transparency in terms of regulatory processes are straining the
relationship between regulators and pharma. The US Food and Drug Administration (FDA) is placing an increased
emphasis on safety controls, while greater focus on pharmacovigilance in the EU brings mixed blessings for
pharma. Also, while greater collaboration between the FDA and European Medicines Agency (EMA) will ultimately
be beneficial for pharma through the streamlining of development and approval requirements, thereby reducing
costs, in the short term it could lead to broadening of approval restrictions across multiple markets.
• Branded biologics in the US are eligible to receive 4 years' data exclusivity and 12 years' market exclusivity. This
means that once the biosimilar pathway is up and running, biosimilars developers will be able to submit their
application 4 years after the original product’s approval (once the 4 years' data exclusivity is up), well in time for
launch once the 12-year period has lapsed, provided there are no patent issues. However, the issue of exclusivity
is currently under further debate in the US by a number of House of Representative members. President Obama
stepped into the argument when in February 2011 he announced that he wished to shorten market exclusivity to 7
years from 12 years, thus reducing the timescale for biosimilars to enter the US market. Clarification as to the
meaning of exclusivity periods with reference to FDA reviews is expected in the near future.
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Executive Summary
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© Datamonitor. This report is a licensed product and is not to be photocopied Page 8
• In the emerging markets, corruption is common, with lengthy patent reviews, compulsory licenses and inadequate
patent protection – factors which continue to act as a disincentive for international pharmaceutical companies to
launch innovative products there.
Figure 3 illustrates the market and data exclusivity processes in the US and the EU.
Figure 3: Market and data exclusivity for New Drug Applications and Biologic License Applications in the US
and the EU
NDA: New Drug Application
Market and data exclusivity
Generic application after 4 years if application contains a certification of patent invalidity or non-infringement (Paragraph IV filing)*
3 years 6 months
Abbreviated NDAsor No 505b2 applications receive 3 additional years
Pediatricexclusivity is an additional 6 months
US: Original drugs
5 years
12 years
US: Original biologic drugs
Manufacturers of biologic drugs get at least 12 years exclusivity As with NDAs, 6 months pediatric exclusivity is included
6 months
2 years
Data exclusivity Market exclusivity
Branded product receivesnew license
Generics application Generics launch
* = Additional market exclusivity if new indication is registeredd in first 8 years
EU: Original drugs
8 years 2 years 1 year*
Market and data exclusivity
Source: Datamonitor D A T A M O N I T O R
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Executive Summary
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© Datamonitor. This report is a licensed product and is not to be photocopied Page 9
Pricing and reimbursement
• As healthcare expenditure continues to grow, governments in many countries across the EU, as well as in Australia
and Japan, are turning to drug price cuts and reimbursement restrictions to reduce their expenditure as part of
austerity measures.
• Also countries, including France, Japan, and Germany, are increasing the usage of cost-effectiveness analysis in
their evaluations of new drugs, although this is often perceived by pharma as a barrier to rewarding innovation.
• In the future, drug price negotiations between manufacturers and regulatory authorities or insurers may become the
norm rather than the exception for pharma, making it harder for companies to obtain reimbursement, as well as
impacting sales through pricing pressures. Already pharma are utilizing risk-sharing agreements in order to gain
market access for novel drugs that would otherwise unlikely be reimbursed.
• In the US, discounts and rebates are the main issue facing branded pharma. Healthcare reform measures enacted
in 2010 included the 50% discount on branded drugs in the Medicare Part D coverage gap. This has already saved
seniors $38m in the first 2 months of 2011 alone (Taylor, 2011b). Together with the increased Medicaid discount
which has also impacted US pharma, these measures are expected to result in a 1–3% drop in US sales in 2010,
with this forecast to double in 2011, impacting companies with a high proportion of US sales the most. However,
the medium-term outlook is positive for pharma.
• In order to provide greater healthcare coverage and service, governments in emerging markets are increasingly
utilizing price cuts in to contain costs. However, in order to drive sales of off-patent brands in these markets, a
number of pharma companies are voluntarily cutting their drug prices to stimulate volume uptake.
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Executive Summary
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© Datamonitor. This report is a licensed product and is not to be photocopied Page 10
Figure 4 summarizes the range of pricing and reimbursement pressures that are negatively impacting pharma in the
developed markets.
Figure 4: A range of pricing and reimbursement pressures are negatively impacting pharma in the developed
markets
IQWIG = Institute for Quality and Efficiency in Healthcare (Institut für Qualität und Wirkschaftlichkeit Im Gesundheitswesen)
Price cuts • 2010 saw price cuts in
Japan, Australia, France, Italy, Germany and China
• Both branded and generic drugs affected
• Reduce profits for Pharma
Growing price negotiation• Could make it harder for companies to
obtain reimbursement
• Increases cost-cutting pressures
• Germany introduced new price negotiation requirements in January 2011
• Value-based pricing system to be implemented from 2014 in the UK may involve an element of pricing negotiation
Growing price negotiation• Could make it harder for companies to
obtain reimbursement
• Increases cost-cutting pressures
• Germany introduced new price negotiation requirements in January 2011
• Value-based pricing system to be implemented from 2014 in the UK may involve an element of pricing negotiation
Greater use of pharmacoeconomics
• Support for comparative effectiveness research in the US, strengthened through healthcare reform
• IQWIG in Germany has started to use cost-effectiveness analysis in its evaluations
• France has pledged to speed up its cost-benefit evaluations of new drugs
Greater use of pharmacoeconomics
• Support for comparative effectiveness research in the US, strengthened through healthcare reform
• IQWIG in Germany has started to use cost-effectiveness analysis in its evaluations
• France has pledged to speed up its cost-benefit evaluations of new drugs
US healthcare reform• Rise in minimum Medicaid
branded drug rebate from 15.1% to 23.1%
• 50% discount on Medicare drugs for seniors in the Part D coverage gap
Reimbursement cuts• French government assigned
110 drugs to a new lower reimbursement level in 2010
• Reimbursement of prescription drugs based on the cheapest versions in Italy
Pricing and reimbursement pressures
Source: Datamonitor D A T A M O N I T O R
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Executive Summary
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© Datamonitor. This report is a licensed product and is not to be photocopied Page 11
Related Reports
Datamonitor (2010) UK Pharmaceutical Market Overview, June 2010, DMHC2608
Datamonitor (2010) Italy Pharmaceutical Market Overview, June 2010, DMHC2619
Datamonitor (2010) Australia Pharmaceutical Market Overview, June 2010, DMHC2646
Datamonitor (2010) Japan Pharmaceutical Market Overview, July 2010, DMHC2622
Datamonitor (2010) Brazil Pharmaceutical Market Overview, August 2010, DMHC2647
Datamonitor (2010) US Pharmaceutical Market Overview, September 2010, DMHC2621
Datamonitor (2010) China Pharmaceutical Market Overview, December 2010, DMHC2648
Datamonitor (2010) Russia Pharmaceutical Market Overview, December 2010, DMHC2657
Datamonitor (2010) India Pharmaceutical Market Overview, December 2010, DMHC2660
Datamonitor (2010) Germany Pharmaceutical Market Overview, December 2010, HC00002-001
Datamonitor (2010) France Pharmaceutical Market Overview, December 2010, HC00002-002
Datamonitor (2010) Spain Pharmaceutical Market Overview, December 2010, HC00002-003
Upcoming related reports
Datamonitor (2011) Pharmaceutical Key Trends 2011 – Biosimilar Market Overview, HC00062-006
Datamonitor (2011) Pharmaceutical Key Trends 2011 – Drivers and Resistors, HC00062-002
Datamonitor (2011) Pharmaceutical Key Trends 2011 – Generics Market Overview, HC00062-007
Datamonitor (2011) Pharmaceutical Key Trends 2011 – Pharmaceutical Industry Infrastructure Overview, HC00062-008
Datamonitor (2011) Pharmaceutical Key Trends 2011 – Prescription Pharmaceutical Market Sales Overview, HC00062-005
Datamonitor (2011) Pharmaceutical Key Trends 2011 – Socio-demographic and Economic Overview, HC00062-003
Page 12
Table of Contents
Pharmaceutical Key Trends 2011 – Healthcare System and Drug Regulatory Overview HC00062-004/Published 03/2011
© Datamonitor. This report is a licensed product and is not to be photocopied Page 12
TABLE OF CONTENTS
About Datamonitor Healthcare 2 About the Healthcare Strategic Analysis Team 2
Executive Summary 3 Introduction 3 Strategic scoping and focus 4 Key findings 5 Key findings 5 Related Reports 11 Upcoming related reports 11
Healthcare Expenditure 14 Healthcare expenditure is growing fast 14
Healthcare Reforms 21 Healthcare reforms focus on improving access and cutting costs 21 The main aim of healthcare reforms in the EU and Japan is to contain costs 22 Healthcare reforms in emerging markets will positively impact pharma 27 Healthcare reforms in the US will largely have a neutral impact on pharma 30 Healthcare systems globally are converging towards a similar model 38 Several key markets are decentralizing healthcare decision-making to increase efficiency 41
Regulatory Issues 44 Regulatory changes have a largely negative impact on pharma 44 Developed markets exhibit a stable intellectual property environment 49 The intellectual property environments in the emerging markets are seen as inadequate 53
Pricing and Reimbursement 57 Key global pricing and reimbursement controls 57 Pricing and reimbursement cuts were key elements included in austerity measures in many developed markets 59 Pricing pressures are also felt in the emerging markets 71 Raised cost-effectiveness barriers lead to reimbursement restrictions 75 Risk-sharing is becoming a viable option for both payers and industry, particularly in Europe 80 Price negotiation may be the way of the future 87
Bibliography 90
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Table of Contents
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Publications and online articles 90 Datamonitor reports 102
Appendix 103 Exchange rates used in this report 103 About Datamonitor 104 Disclaimer 105
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Healthcare Expenditure
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HEALTHCARE EXPENDITURE
Healthcare expenditure is growing fast
Table 1 summarizes the impact of the global economic downturn on the 12 major markets (the US, Japan, Australia,
France, Germany, Italy, Spain, the UK, Brazil, Russia, India, and China). In most markets, overall total healthcare
expenditure increased from 2006 to 2009.
Table 1: Total healthcare expenditure, 2006–09 ($bn)
Total health expenditure ($bn) 2006 2007 2008 2009
US 2,239 2,400 2,549 2,685
France 272 283 280 304
Germany 343 353 367 396
Italy 176 183 193 210
UK 169 178 190 235
Australia 43 45 47 52
Spain 101 106 113 123
Brazil 109 117 122 140
Japan 379 385 344 317
Russia 24 31 37 49
China 139 158 176 188
India 36 38 40 43
Source: Datamonitor Country Statistics Database, 2010 D A T A M O N I T O R
There are several factors driving up healthcare expenditure across the markets analyzed:
• An aging population – This is undoubtedly putting pressure on healthcare systems, particularly in developed
markets. As life expectancy increases so too does the number of elderly people, driving the up the prevalence of
age-associated diseases which place perhaps the highest burden on healthcare systems.
• Growing prevalence of lifestyle diseases – There are high and growing morbidity and mortality rates associated
with conditions such as cardiovascular disease and type 2 diabetes in most markets analyzed. These are
attributable to the rise in obesity that has been observed in developed as well as emerging markets over the past
few decades. This in itself has been driven by changes in Western society including reduced physical activity,
alterations in work patterns, transportation methods, food production, and diet. These "lifestyle diseases", as they
have become known, place significant burdens on state and private medical providers.
• Growing use of expensive drugs and technology – The advent of new medical technologies and biologic drugs
are also contributing to rising healthcare costs as well as necessitating a higher spend on physician and clinical
services (Congressional Budget Office, 2008).
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• Expanding government healthcare coverage – The expansion of healthcare coverage, both in the US, which is
set to take place as a result of the healthcare reform measures currently being undertaken, and in the emerging
and growth markets, are contributing to the healthcare expenditure rises. In India, the government has launched a
policy to build more hospitals, improve local access to healthcare, and improve the quality of medical training
(Ministry of Health & Family Welfare, 2009), while under China’s Opinions on Advancing Healthcare Reform and
the Implementation Plan on Advancing Healthcare Reform 2009–2011, the Chinese government has pledged to
spend CNY850bn ($125bn) on healthcare reforms between 2009 and 2011. One of its aims is to increase the
number of private hospitals and development of hospitals and clinics, particularly in small and rural communities.
Rising healthcare expenditure is also exacerbated by the impact of the global economic downturn, which has put further
pressure on healthcare systems, primarily through reduced funding through taxation as a result of growing unemployment
(Figure 5).
Figure 5: Factors driving up healthcare expenditure across the major developed and emerging markets
1 = Growing patient populations stretches existing healthcare resources2 = Economic downturn puts pressure on payers through reduced funding via taxation as a result of growing unemployment3 = Economic downturn results in less out-of-pocket spend on healthcare (e.g. in the US), thereby impacting Pharma4 = The patent cliff and erosion of branded drug sales directly impact Pharma5 = Cost-containment strategies implemented by payers negatively impact Pharma* = Sales loss for the top 50 global pharma companies in the US, Japan, France, Germany, Italy, Spain and the UK
A B = A has a negative impact on B
Global economic downturn Patent cliff
1 2 3 4
5
• Aging patient populations• Growing prevalence of chronic diseases• Greater use of expensive treatments• Expanding public healthcare coverage
Rising healthcare costs
Cost-containment and regulatory pressures intensify
• Reducing healthcare budget • Pricing and reimbursement cuts• Driving generic uptake• Growing regulatory scrutiny
• Governments look to pay down debts
• Reduced out-of-pocket spend
• $100bn* in lost branded sales due to generic erosion during 2010–14
• Biosimilar uptake set to accelerate
Pharma’s strategic responsesStrategies to drive profitability• Innovation• Diversification• Cost savings
Source: Datamonitor D A T A M O N I T O R
Page 16
Healthcare Expenditure
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© Datamonitor. This report is a licensed product and is not to be photocopied Page 16
The proportion of public contribution to healthcare is greater in the developed as compared to the emerging markets
The average spend on healthcare as a percentage of gross domestic product (GDP) for the 12 major markets was 8.6% in
2008 (WHO, 2011). The US spent the largest proportion of GDP on healthcare, totaling 16.0% of its GDP in 2008 (WHO,
2011), which increased to between 17.6–18.8% in 2009 (Young, 2011; The Economist Intelligence Unit, 2010). Other
developed markets spent between 8.1% (Japan) and 11.1% (France) during 2008, while the emerging and growth markets
(with the exception of Brazil) spent between 4.0% and 5.2% (India and Russia, respectively) (Figure 6).
Figure 6: Healthcare expenditure indicators in the US, Japan, Australia, five major EU markets, and the BRIC
nations, 2008
0
2
4
6
8
10
12
14
16
18
USFran
ce
German
yIta
ly UK
Austra
liaSpa
inBraz
il
Japa
n
Russia
China
IndiaHe
alth
exp
endi
ture
as
a pr
opor
tion
of G
DP
(%)
Government health expenditure Private (out of pocket) expenditure
Private (private insurance plans) expenditure
GDP: gross domestic product
Source: Datamonitor, OECD Stat Extracts, 2009; WHOSIS, 2010 D A T A M O N I T O R
In 2008, the average public expenditure as a proportion of total health expenditure was 74% in the US, five major European
markets, Japan and Australia combined (WHO, 2010), reflecting the dominance of public systems in these countries, which
serve the healthcare needs of the majority if not all of the population. Private healthcare in these markets tends to be
supplementary to the public healthcare system so comprises a lower proportion of overall health spend. The US is the
exception, where public and private insurance expenditure is equal (51.6% versus 48.4%, respectively, in 2009) (Young,
2011).
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Healthcare Expenditure
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In Europe, the balance of power is in the hands of large national payers. This has led to less favorable pricing
arrangements and more restrictions for pharma as compared to in the US which boasts the highest drug prices in the world.
Meanwhile, although the BRIC countries (Brazil, Russia, India, and China) have lower health expenditures as a proportion
of GDP relative to the developed markets, public healthcare spend is increasing as governments make healthcare a bigger
priority. Indeed, India’s public healthcare expenditure increased from 19.6% in 2006 to 28% in 2008 (WHOSIS, 2010).
Table 2 compares governmental, private (out-of-pocket), and private (private health insurance plans) expenditure on
healthcare as a proportion of GDP in the 12 major markets analyzed in 2008. France had the highest proportion of
governmental healthcare expenditure, reflecting its well-developed public healthcare system, while Brazil had the highest
out-of-pocket expenditure, as a result of its high out-of-pocket payments for the use of private healthcare services by the
wealthy.
Table 2: The proportion of governmental and private expenditure on healthcare in the 12 major markets as a
proportion of GDP (%), 2008
Country Government health expenditure as a
proportion of GDP
Private (out of pocket) expenditure as a
proportion of GDP
Private (private insurance plans) expenditure as a
proportion of GDP
Total healthcare expenditure as a proportion
of GDP
US 7.4 1.9 6.6 16.0
France 8.8 0.8 1.6 11.1
Germany 8.0 1.4 1.0 10.4
Italy 7.0 1.7 0.3 9.0
UK 7.5 1.0 0.6 9.0
Australia 6.0 1.5 1.3 8.8
Spain 6.3 1.8 0.6 8.7
Brazil 3.7 2.7 2.0 8.4
Japan 6.6 1.3 0.3 8.1
Russia 3.4 1.5 0.3 5.2
China 2.0 2.1 0.2 4.3
India 1.1 2.6 0.3 4.0
GDP = gross domestic product
Source: OECD Stat Extracts, 2009; WHOSIS, 2010 D A T A M O N I T O R
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The US has the highest healthcare spend in the world
US healthcare expenditure as a proportion of GDP is far higher than in any other developed market, as previously
discussed. Government healthcare expenditure as a proportion of GDP was 7.4% in the US in 2008, on par with that in
other developed markets. However, while government contribution in France, Germany, Italy, Spain, the UK and Australia
covers an average of 77% of total healthcare expenditure, it only accounts for around half (51.6% in 2009) of the cost of
healthcare in the US (Young, 2011), which points to an astonishing level of inefficiency in the US system (AT Kearney,
2009).
Figure 7 summarizes the reasons why healthcare costs are high in the US, including the fragmentation of the insurance
system and the high participation of private for-profit organizations that lead to high non-medical costs, as well as high
physician fees among others.
Figure 7: A range of factors are contributing to high healthcare costs in the US
For-profit organizations well represented in the healthcare system vs mostly public organizations in the EU
Fragmented system reducing the possibility of cutting costs by efficiencies of scale
High cost of end-of-life care
Reimbursement and payment inefficiencies
Extensive use of costly emergency care by the uninsured
High administrative costs
High physician fees partly resulting from growing medical malpractice insurance fees
High expenditure for individuals with low deductible and low co-payment fees resulting from disincentive to cut costs and lack of gatekeepers
High healthcare
costs
Source: Datamonitor D A T A M O N I T O R
As a result of the recently passed US healthcare reform, the government will foot an even larger proportion of the total
healthcare bill in the future. Government healthcare spending in the US is already outpacing that of private insurers;
indeed, for the first time, government expenditure in 2009 was higher than of private insurers. In fact, government spending
on Medicaid and Medicare in 2009 (versus 2008) rose six times faster than that spent by private insurers: the government
spent $373.9bn on Medicaid (a 9% increase over 2008) and $502.3bn on Medicare (a 7.9% rise in spending versus 2008).
This was attributed to a greater number of US citizens requiring public assistance. The recession caused an additional 3.5
million people to seek treatment through Medicaid as unemployment reached 10%, while 6.2 million fewer people were
enrolled in private health insurance (a 3.2% decline) (Young, 2011).
Furthermore, costs are not only predicted to increase as a result of the US healthcare reforms; by 2019 US healthcare
spend is forecast to comprise 19.6% of US GDP, up from 18.8% in 2009, but are also expected to increase faster than
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originally anticipated, at 6.3% per year over the next decade rather than at 6.1% as initially predicted (The Economist
Intelligence Unit, 2010). As a result, improving healthcare coverage in the US will be at the expense of containing the
growth of healthcare costs.
Europe’s austerity measures will see a real-term reduction in healthcare expenditure
Governments in Europe have begun to implement austerity measures as a result of the recession that will see a reduction
(in real terms) in healthcare expenditure. France is a key example of this, with President Nickolas Sarkozy having
announced plans to reduce healthcare expenditure growth to 2.9% in 2011 (Mimosas, 2010). In the UK, while the National
Health Service (NHS) budget is to be increased from £104bn ($161bn) in 2010 to £114bn ($176bn) over the next 4 years (a
2.3% annual increase), the £10bn ($156bn) rise actually translates into a cut in real terms of around £42bn ($65bn)
between 2010 and 2014 (The Pharma Letter, 2010b).
Public healthcare systems are underfunded in the emerging and growth markets…
In the emerging markets, where public healthcare systems are underfunded, private healthcare expenditure accounts for a
higher proportion of overall heath expenditure. In India, for example, public health expenditure accounted for only 28.0% of
the country's total healthcare costs in 2008, reflecting the very basic level of healthcare provided by the government.
Indeed, health insurance in India covered just 11% of the population in 2007 (Bhattacharjya and Sapra, 2008). In Brazil,
China and Russia, government expenditure accounted for 44.0%, 46.5% and 65.4% of total healthcare spend in 2008,
respectively.
Nevertheless, public healthcare expenditure in these markets is growing, driven by the fast economic growth of such
markets and as governments prioritize healthcare through the implementation of reforms in order to expand healthcare
access. Furthermore, with the expanding and aging populations in addition to growing prevalence of chronic diseases
associated with old-age and more Westernized lifestyles, governments have been forced to react accordingly and spend
more on healthcare.
For example, the Brazilian government spent BRL47.8bn ($24.3bn) in 2008, compared to BRL27.8bn ($14.1bn) in 2003
(Shah, 2009), while India’s public healthcare expenditure rose from 19.6% in 2006 to 28.0% in 2008 (WHOSIS, 2010). In
China, while total health expenditure has risen over the past 2 decades, so too has per capita health expenditure, although
healthcare expenditure as a proportion of GDP remains low. Worryingly, government healthcare expenditure remains below
the level required to improve healthcare services in China (WHOSIS, 2010). In order to address this problem, the Chinese
government recently embarked on a wide-ranging healthcare system reform (Opinions on Advancing Healthcare Reform
and the Implementation Plan on Advancing Healthcare Reform 2009–2011), focusing on wider healthcare coverage and
improved healthcare service provision. In addition, as of October 2010, the New Rural Cooperative Medical System
(NRCMS) covered 883 million Chinese among the rural population, while the Urban Resident Basic Medical Insurance
(URBMI) for urban non-workers and the Basic Medical Insurance System (BMI) for urban workers together cover 400
million people (Ministry of Health, 2010). This means that more than 96% of the Chinese population is now covered by
basic healthcare insurance.
However, despite improving economies, the emerging markets like the developed markets, are under pressure to contain
costs, leading to implementation of strategies such as price cuts that are impacting pharma companies operating in such
markets.
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…resulting in high out-of-pocket expenditure
As a result of the low (albeit growing) government contribution to healthcare expenditure in the emerging markets, out-of-
pocket spend remains high. However, out-of-pocket spending is falling as observed in China, India, and Russia during
2006–08 (from 30.0% to 28.3% in Russia; from 53.9% to 49.0% in China; and from 75.6% to 64.4% in India [WHOSIS,
2010]), driven by increased government healthcare expenditure. This indicates that out-of-pocket expenditure will continue
to drop in line with Western trends, as the public healthcare provision in these countries continue to improve, opening up
other market segments besides the affluent and middle classes.
Figure 8: Proportion of government and private health expenditure vs personal disposable income in the US,
the UK, France Germany, Brazil, Russia, China, Turkey, South Korea and Mexico, 2009
Source: Economic Intelligence Unit 2009 and WHOSIS, 2010 D A T A M O N I T O R
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HEALTHCARE REFORMS
Healthcare reforms focus on improving access and cutting costs
In response to the growing healthcare pressures facing governments and payers, numerous countries are reforming their
healthcare systems, ultimately to provide better treatment and to contain costs. In developed markets which already have a
high standard of healthcare, such reforms tend to focus on reducing costs (often negatively impacting pharmaceutical
sales), whereas developing markets are concentrating on improving the quality and coverage of healthcare, providing
opportunities particularly for generics manufacturers.
The exception, however, is the US, where although one aspect of the ongoing healthcare reforms is to contain costs, the
other key aim is to provide almost-universal healthcare coverage.
A number of countries are also implementing decentralization strategies which have both positive and negative aspects for
pharma as well as other key stakeholders.
Figure 9 summarizes the positive, negative, and neutral impacts which reforms have on the pharmaceutical industry.
Figure 9: Healthcare reforms can have positive or negative effects on pharmaceutical sales
Reforms seen as negative Reforms seen as positiveReforms seen as neutral
US Healthcare Reform• Pharma: short-term sales
dip followed by mid-term sales growth – increase in discounts and rebates but larger sales volume from more insured people…
• …but long-term negative impact – due to intensifying cost-containment pressures
• Private insurers: mixed impact – more customers overall but harsher competitive environment
• Individuals: mixed impact –more affordable insurance for low earners but cost may be transferred to others
• Reduction in healthcare expenditure – Strategies include hospital reforms in order to contain costs and insurance reforms to transfer greater healthcare costs onto individuals to rein in spending
• Pricing and reimbursement cuts –Have an adverse effect on pharma sales.
• Driving generic uptake –Driving greater erosion of off-patent branded drug sales
• Expanding healthcare services – Building more hospitals, improving local access to healthcare, and improving the quality of medical training
• Improving regulatory structure – Reforms intended to strengthen pharmaceutical regulation and to align with international standards
• Expanding health insurance – Improving access to poorer often rural communities
Source: Datamonitor D A T A M O N I T O R
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The main aim of healthcare reforms in the EU and Japan is to contain costs
In the EU and Japan, healthcare expenditure is rising due to the aging population, the growing prevalence of chronic (often
lifestyle) diseases, and the more frequent use of expensive biologic therapies. Simultaneously, as a result of the recent
economic downturn, governments are looking to pay down their debts and, as a result, healthcare funding is under
increased scrutiny. Furthermore, this is exacerbated by rising unemployment and falling tax contributions.
Consequently, the main aim of healthcare reforms in Japan and the EU are to contain costs, without impacting quality of
service. Governments in these markets are therefore turning to solutions such as pricing and reimbursement cuts, driving
up generic usage, insurance and hospital reforms, and decentralization strategies. However, the outcome of such reforms
ultimately has a negative impact on branded pharma.
Healthcare reforms in the EU and Japan have the following impacts on pharma:
• Reduction in healthcare expenditure – Strategies include hospital reforms in order to contain costs and
insurance reforms to transfer greater healthcare costs onto individuals to rein in spending
• Pricing and reimbursement cuts – Have an adverse effect on pharma sales.
• Driving generic uptake – Driving greater erosion of off-patent branded drug sales.
Figure 10: Government responses to rising healthcare costs
1 = Growing patient populations stretches existing healthcare resources2 = Economic downturn puts pressure on payers through reduced funding via taxation as a result of growing unemployment3 = Economic downturn results in less out-of-pocket spend on healthcare (e.g. in the US), thereby impacting Pharma4 = The patent cliff and erosion of branded drug sales directly impact Pharma5 = Cost-containment strategies implemented by payers negatively impact Pharma* = Sales loss for the top 50 global pharma companies in the US, Japan, France, Germany, Italy, Spain and the UK
A B = A has a negative impact on B
Global economic downturn Patent cliff
1 2 3 4
5
• Aging patient populations• Growing prevalence of chronic diseases• Greater use of expensive treatments• Expanding public healthcare coverage
Rising healthcare costs
Cost-containment and regulatory pressures intensify
• Reducing healthcare budget • Pricing and reimbursement cuts• Driving generic uptake• Growing regulatory scrutiny
• Governments look to pay down debts
• Reduced out-of-pocket spend
• $100bn* in lost branded sales due to generic erosion during 2010–14
• Biosimilar uptake set to accelerate
Pharma’s strategic responsesStrategies to drive profitability• Innovation• Diversification• Cost savings
Source: Datamonitor D A T A M O N I T O R
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France is reforming hospital management to reduce costs
Reducing expenditure in state hospitals is one way in which healthcare costs and national public deficits can be cut in
developed markets. In 2009, President Nickolas Sarkozy introduced a series of proposals to reform hospital management
in France by reducing costs in state hospitals. President Sarkozy asked hospitals to hire more business managers and
operate more like private companies, and has also announced plans to reduce healthcare expenditure growth to 2.9% in
2011 (Mimosas, 2010). However, the proposals were met with a public backlash as critics argued that the reforms would
put too much focus on profit rather than patient care, and could also impact pharma sales in the hospital sector.
Meanwhile, France is also currently changing to a fee-for-service system in its state hospitals in the hope that it will be
easier for the government to ensure money is being spent efficiently. This compares to the old system of providing
hospitals with annual lump sum payments (Gauthier-Villars, 2009).
Germany is transferring cost of healthcare onto individuals to rein in spending
Since 2004, the German government has engaged in a series of healthcare reforms aimed at helping sustain the quality of
the healthcare system despite mounting pressure from an aging population. The first reform in 2004 was collectively known
as the GMG (Gesetz Zur Modernisierung der Gestetzlichen Krankenversicherung, or GKV modernization legislation). This
strategy aimed to increase quality in the healthcare system and particularly in hospitals and ambulatory care. In 2004, the
government also introduced minimum volume requirements for complex procedures such as transplantations, thus
requiring hospitals to provide this number in order to be reimbursed, which helped improve quality of care and bring down
costs.
However, in order to reduce costs further the health insurance system required further reform, and so the Act for
Strengthening Competition in Public Health Insurance (GKV-WSG, by its German acronym) was passed in 2007, this time
targeting the health insurance sector. This had some positive effects for patients in creating universal health coverage for
the first time. It also had a positive effect on insurers, who benefited from the injection of increased competition; a key part
of the reforms was the introduction of a government-run central sickness fund, into which all Gesetzliche
Krankenversicherung (GKV; Germany’s universal healthcare system) contributions have been paid since January 2009.
The central fund then filters money to the individual sickness funds (Krankenkassen). Insurance companies with older
members receive higher fees than those with younger members. However, in July 2010 the government raised health
insurance premiums to 15.5% of gross pay from 14.9% in an attempt to tackle its healthcare account deficit (Buergin,
2010).
Additional financial pressure will be placed on workers if the new reforms of the statutory health insurance system proposed
by the government in February 2010 go ahead. As a result, the current state contribution system will be replaced with a
Kopfpauschal (per-capita package price) flat-rate premium charge whereby everyone in the system pays the same amount
instead of the current income-based contributions system. Under this proposal, employer health insurance contributions
would be frozen at the current rate and insurance policyholders would pay any extra costs of future increases in health
insurance premiums. Employees would potentially pay a minimum flat rate of around €110 ($146) and family policies would
be abolished (Henning, 2010).
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Another negative effect on citizens is that extra contributions incurred in cases of future increases in health insurance
premiums would only secure basic health coverage, with insurers allowed to share additional charges for value added
services, and the two-class health insurance system, already regarded by many as unfair, would be emphasized more
under this reform.
Italy has been engaged in a raft of healthcare reforms
Italy has made a number of reforms to its Servizio Sanitario Nazionale (SSN, the country's national health service) over the
past 15 years to improve its healthcare system. In May 2010, like several other key markets, Italy’s government felt the
need to reduce pharmaceutical expenditure and consequently passed a series of measures seeking to achieve an
estimated €1.2bn ($1.6bn) reduction in pharmaceutical expenditure during 2010–12, as part of its €24bn ($32bn) austerity
package (Adams, 2010b; Bruce, 2010b). Reform measures include:
• Price tenders organized by the Italian Medicines Agency (AIFA) for the supply of a number of generics and off-
patent brands to be reimbursed by the SSN (which will include no more than four equivalent generics).
• Reimbursement of prescription drugs will be based on the cheapest versions.
• A proposed price cut of 12.5% from 2011 will affect generic drugs and off-patent drugs that did not maintain
temporary price cuts in 2009. These measures are expected to increase the level of generic substitution in Italy.
• Prices cuts on pharmaceuticals that fail to meet efficacy criteria in “pay for performance” (risk-sharing) programs
• Wholesaler margin cuts from 6.65% to 3.64%, saving €400m ($531m).
• Allowing certain hospital medicines to be distributed through the "territorial system", via pharmacy chains and direct
distribution which is expected to save a further €600m ($796m).
For more info please see the Pricing and Reimbursement Chapter of this report.
Spain’s recent healthcare reforms have focused on pricing and reimbursement issues
From 2004 to 2010, most reforms in Spain have concentrated on introducing cost-saving initiatives through major changes
in the pricing and reimbursement system. In May 2010, the Spanish government unveiled an austerity package of
measures designed to cut the country’s drug expenditure by discounting the prices of drugs not included in the reference
pricing system (i.e. patented medicines) by 7.5% from August 2010 (4% for orphan drugs). The aim is to save the health
system around €1.3bn ($1.7bn), €1bn ($1.3bn) of which is expected to come from medicine price cuts (Bruce, 2010h). The
cuts followed reductions in generic and off-patent drug prices by up to 30% in May 2010 (Taylor, 2010g).
UK primary care trusts will be phased out
There are currently plans in the UK to reform the way in which the National Health Service (NHS) is run by making it more
patient-led, focusing on healthcare outcomes in order to reduce management costs. Reforms planned for April 2011 hand
over power from primary care trusts (PCTs) to commission services and treatments to general practitioners (GPs), who are
expected to form consortia, with all PCTs to be phased out by 2013. The draft legislation, the Health and Social Care Bill,
published in January 2011, stated that the reorganization is expected to generate savings of £5bn ($7. 7bn) by 2014–15
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and £1.7bn ($2.6bn) per year thereafter (Bruce, 2011c). By 2014, all hospitals will be foundation trusts and all will be
entitled to leave public ownership but will still provide public services (Ramesh, 2010).
Reforms to the current pricing system in the UK are also on the agenda, with the expected replacement of the current
pharmaceutical pricing regulation scheme with a value-based pricing system in 2014. The Department of Health will begin
developing the system, in collaboration with pharmaceutical companies, in April 2011. Under the new proposals, the value
of new products will be assessed and their benefits compared with the benefits that could be gained if the funds were used
elsewhere in the NHS. The government will set a range of thresholds (maximum prices) reflecting the different values that
medicines offer. The proposals will see the National Institute of Health and Clinical Excellence continuing to produce
guidelines and making cost-effectiveness evaluations, but it will no longer decide on whether or not drugs will be
reimbursed by the NHS. This would be welcome news to pharma, although questions on the full repercussions of the
reform remain while the details are finalized.
The new system also seems to imply the use of pricing and reimbursement negotiations between the Department of Health
and drug manufacturers, which will be seen as a significant negative to the pharmaceutical industry, which currently enjoys
free pricing of drugs in this market.
An aging population has necessitated cost-containment measures in Japan
Reforms in Japan have mainly been focused on containing healthcare costs associated with the elderly population. In April
2008, the Elderly Healthcare Security Act split the previous long-term care insurance into two parts:
• Early-stage elderly Insurance (for individuals aged 65–74 years, otherwise known as the Health Insurance for the
Young-Old).
• Late-stage elderly Insurance (for individuals over 75 otherwise known as the Elderly Healthcare System for the Old-
Old).
The new system covers approximately 13 million people, including around 2 million who used to be dependents of
their children and did not have to pay health insurance premiums. One aim of the new system was to reduce
healthcare costs by making participants more aware of them. However, it may well result in a greater financial burden
on pensioners who will have to bear the cost of new insurance premiums from pension payments that are not
increasing. Some older people may even forego visiting their physicians because of the financial burden (The Japan
Times, 2008).
Nevertheless, due to continued pressure as a result of rising healthcare costs among the elderly, the government
indicated in October 2010 that it would remove the current insurance system for the over 75s and start a new program
for this group in fiscal 2013. As part of a new round of reforms, there are proposals to double the co-payment made
by the elderly aged 70–74 years, to 20%, based on the total cost of treatment, including drugs and consultation fees
(Haydock, 2010b).
While the above reforms might not have much of a direct impact on pharma directly, other recent changes to the drug
pricing system in Japan have spelled bad news to drugs manufacturers. The following major changes are expected to
take place (Scrip, 2009; Pharma Japan, 2010):
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• Companies must develop innovative drugs for indications with unmet medical needs which are not available in
Japan or pay a penalty
• Combination drugs are to be priced at 80% of the sum of prices of individual drugs in the combination
• Current prices are set at the sum of the National Health Insurance (NHI) prices of the combined drugs
• Changes to generic and biosimilar prices to encourage uptake
• Long-listed brands and their generic competitors to be subject to a 2.2% average price reduction
• Changes to average overseas price calculation to bring down prices of branded drugs at launch
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Healthcare reforms in emerging markets will positively impact pharma
While healthcare reforms in developed markets are focused largely on containing costs, reforms in the emerging and
growth markets concentrate on improving the quality and coverage of healthcare, funded through greater government
expenditure as well as through growing private insurance coverage. Such reforms provide opportunities for pharma,
particularly for generics manufacturers. Nevertheless, as healthcare access expands and quality improves, funding
pressures increase, leading to the introduction of cost-containment.
Key aims of healthcare reforms in emerging markets include the following:
• Expanding healthcare services – Building more hospitals, improving local access to healthcare, and improving
the quality of medical training
• Improving regulatory structure – The Chinese State Food and Drug Administration (SFDA) issued a new
regulation in January 2009 called Requirements on Special Approval of New Drug Registration, while the 2009
Russian reforms intended to strengthen pharmaceutical regulation and to align with international standards and
obligations of clinical trial regulation
• Expanding health insurance – Improving access to poorer often rural communities
Figure 11 shows the key aims of healthcare reforms in Brazil, India, Russia, and China
Figure 11: Expansion of healthcare provision is top of the agenda for Brazil, Russia, India, and China
Higher sales volumeGrowing sales of high value drugs
Over time growing cost-containment pressures leading to price cuts,
reimbursement restrictions and growing generics use
Russia
• Reimbursement program in 2005 led to better access to drugs
• 2011 modernization plan to:
- improve the mandatory health insurance system
- provide better preventative care
- boost availability of domestically produced drugs
India
• Expanded access to drugs in both urban and rural areas
• Build more hospitals and improve local access to healthcare
• Increase public healthcare expenditure to 2-3% of GDP
China• Insurance coverage extended to
include at least 96% of its 1.3 billion population by 2011
• Increase number of healthcare facilities
• Improve access to drugs
Brazil• Expansion of healthcare services
under the Family Health Program (Programa Saúde da Família)
• Government investment in healthcare through the Basic Care Package
Brazil• Expansion of healthcare services
under the Family Health Program (Programa Saúde da Família)
• Government investment in healthcare through the Basic Care Package
Expanded access to healthcare services
and treatments
GDP: gross domestic product
Source: Datamonitor D A T A M O N I T O R
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India plans to expand healthcare services
Access to healthcare is poor across both urban and rural areas in India, with only 11% of the population covered by health
insurance in 2007 (Bhattacharjya and Sapra, 2008), and remains predominantly funded out-of-pocket. Nevertheless,
government funding is improving up from 19.6% in 2006 to 28% in 2008 (WHOSIS, 2010). Other improvements being
implemented in India include the following:
• Expansion of healthcare services – The government has launched a policy to build more hospitals, improve local
access to healthcare, and improve the quality of medical training.
• Increasing health insurance coverage – The 2009–10 government budget allocated $76m for a health insurance
scheme to provide health cover of $745 for every employee and their family who falls below the poverty line, while
the 2010–11 budget extended coverage to an additional 20% of the population covered by the National Rural
Employment Guarantee Act program (Ministry of Health and Family Welfare, 2009).
• More financial support for mental health – In February 2010, the federal government approved INR4,740m
($95m) to tackle the human resource crisis derailing the National Mental Health Program.
However, the Ministry of Health and Family Welfare’s (MHFW's) National Urban Health Mission – established to improve
the health of the poor living in urban areas – has reportedly delayed implementation of its urban health strategies. As such,
implementation is not expected until after 2012, due to the MHFW prioritizing roll-out of its rural healthcare strategy, the
National Rural Health Mission (Sinha, 2010). This will lead to delays in the intended improvements to healthcare in the
cities in India, suggesting that progress is slow on improving inequalities in healthcare across India.
Healthcare continues to be a priority for Brazil’s government
In its effort to expand healthcare coverage and reduce inequalities, the Brazilian government introduced the Family Health
Program (Programa Saúde da Família, PSF) in 1993, which provides a range of healthcare services to families in their
homes, in hospitals, or in clinics. As of 2010, the program has been expanded nationally and has been implemented in 95%
of Brazilian municipalities, with over 55% of the population (over 85 million people) now covered (Harris, 2010). Brazil’s
healthcare system could also benefit from promises made by President Dilma Rousseff to prioritize improvements to
Brazil’s state healthcare system (Bruce, 2011a).
Russia rolls out its 2020 healthcare plan
To help address Russia’s growing mortality rate and improve access to medicines and health insurance across the entire
population, the government passed a long-term “concept of healthcare development through 2020” reform in 2008, which
contained a set of healthcare targets to be achieved by 2020. The government plans to start work on this in 2011 and aims
to extend the average life expectancy from the current 63 years to 75 years by 2020 (Shishkin and Vlassov, 2009). A major
objective of the healthcare plan is to establish a proactive healthcare system, aimed at prophylaxis and early detection of
diseases and out-patient therapy (Bykov, 2009).
Some specific targets to be achieved, which are largely designed to modernize the healthcare system, include (Parfitt,
2010):
• Modernization of the mandatory health insurance system
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• Increased use of information technology
• Installation of new equipment at oncology centers to ensure greater detection of early-stage cancers
• Increasing the population’s access to high technology medical services from 25% to 80% by 2012
• Creation of an improved blood service
• Boosting availability of more domestically produced medicines in Russia
• Optimization of paramedic care for victims of traffic accidents
• Promotion of healthy lifestyles.
A major aim of the government’s 2020 reform as listed above is to improve the mandatory health insurance system by
shifting the decision-making process away from employers and regional authorities in favor of empowering. Consequently,
in October 2010, Russian Prime Minister Vladimir Putin announced proposals to raise mandatory health insurance tax paid
by companies to 5.1% from 2011, which will generate an additional RUB460bn ($14.6bn), which will be allocated to
modernizing medical institutions in Russia, in addition to the RUB24bn ($762m) from the government (RIA Novosti, 2010).
Under the reform, regional governments will pay additional sums as part of standard insurance premiums for non-working
people, which will be used to help cover part of the costs for laboratory tests and in-patient meals.
China is making strides in improving health insurance coverage
The State Council in January 2009 approved the Opinions on Advancing Healthcare Reform and the Implementation Plan
on Advancing Healthcare Reform 2009–11. Under this reform, the Chinese government has pledged to spend RMB850bn
($125bn) on healthcare reforms between 2009 and 2011, including RMB331.8bn ($49bn) from the central government, with
the remainder from local governments (Wen Jiabao, 2009). Key reforms include:
• Merging the three public healthcare schemes (New Rural Cooperative Medical System, Basic Medical Insurance
System for Urban Workers, and Basic Medical Insurance System for Urban Non-workers) into one.
• Increasing the number of private hospitals and development of hospitals and clinics particularly in small and rural
communities.
• Reform of hospital funding, removing the reliance on drug sales, with government agencies taking a greater role in
negotiation with healthcare providers.
• Offering 1.9 million training sessions for village and township medical clinics and urban community medical
institutions between 2009 and 2011, as part of a plan to encourage and train general physicians to work in rural
areas.
• Ensuring that all urban and rural residents are covered by basic healthcare services. By the end of October 2010,
the three public health insurance schemes covered 1,233 million Chinese citizens, accounting for more than 90% of
the total population (Ministry of Health, 2010).
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Healthcare reforms in the US will largely have a neutral impact on pharma
The main drivers of the ongoing US healthcare reform process are the already high but also growing number of uninsured
individuals, and the continued fast-paced growth of healthcare costs that are unsustainable in the long term. However,
while the health reform law may well result in extended health insurance coverage, and increase government involvement
in healthcare, it may fail to control escalating healthcare costs, leading potentially to even faster healthcare cost inflation.
The key reform measures and their impact on individuals, generics companies, private insurers, and branded pharma are
summarized in Figure 12.
Figure 12: Key healthcare reform measures in the US and their wide-ranging impacts
More affordable insurance for low earners and unhealthy individuals but cost may be
transferred to other individuals
More customers overall, but with a higher representation of
less healthy and older individuals
Branded PharmaGenerics companies
Individuals and society Private insurersKey reform measures
Negative impact Mixed impact
Medicare Part D donut hole closure
Medicare Part D donut hole discounts and increased
Medicaid rebatesPositive impact from the
volume growth resulting from more insured individuals,
Medicare Part D donut hole closure and long exclusivity
for biologics
Volume growth from the increase in the number of
insured and continued drive for higher generics use
Restrictions on private insurers, including ban on pre-existing
condition exclusion and cap on cost-sharing
Increased insurance coverage through a combination of
measures including individual mandates and premium
subsidies
Biosimilars approval pathway giving a 12-year exclusivity to
original biologics
Sunshine provisions requiring disclosure of financial
agreements between Pharma and healthcare organizations
and physicians
Positive impact
Healthcare expenditure growth unlikely to be contained
Harsher competitive environment and lower
profitability
Drive towards consolidation and cost cutting
But greater cost-containment pressures and drug discounts
Losing out on longer biologics exclusivity and
ban on pay-for-delay
Limitations on Pharma’s marketing practices
Lower incentive to use generics resulting from
Medicare Part D donut hole closure
Increase in the number of insured
Source: Datamonitor D A T A M O N I T O R
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Despite the uncertainty surrounding the health reform passage, branded pharma was keen for the reform to go through
rather than face uncertainty and the potential introduction of much less favorable legislative changes. However, unlike the
rest of the developed and emerging markets, in general it can be argued that the healthcare reforms will have a neutral
outcome on pharma, with the short-term pain of healthcare reform being offset by medium-term gain.
The most negative provisions will have an immediate impact, and are expected to result in a 1–3% drop in US sales in
2010, with this forecast to double in 2011, impacting companies with a high proportion of US sales the most (Jack, 2010).
However, the medium-term outlook is positive for pharma.
In the long term, however, pharma will experience further negative impacts from the reform due to the intensification of the
cost-containment measures. Specifically, greater government participation in healthcare financing, compounded by the
impetus for private insurers to cut costs in order to maintain profitability, will lead to more intense cost-containment
pressures. However, these pressures are already present in the US even in the absence of healthcare reform (Figure 13).
Figure 13: Increased pressure on private insurers and government programs to cut costs will negatively
impact US pharma in the long term
Insurers profitability hit hard
Limit benefits (restricted by law from 2014)
Restrict provider networks
Pressure on providers and suppliers to cut costs
Lower drug prices
Tougher formulary placement
Greater use of generics
Comparative effectiveness
research
Higher government expenditure
Medicaid rebates
Medicare Payment Advisory Board
Find ways to reduce spending
Lower drug prices
Price negotiation
Greater generics use
No pre-existing condition exclusion, no rescinding of coverage
Medical loss ratio limit, no lifetime or annual
coverage limits
Donut hole discount
Tougher formulary placement
Private insurers Government programs
Source: Datamonitor D A T A M O N I T O R
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However, the health reform law as it stands is not expected to lead to lower healthcare costs. Therefore, a likely future
scenario will involve the introduction of incremental legislative change designed to contain healthcare costs by more
extensive nationalization of healthcare delivery, the end result being a convergence towards a European model of
socialized healthcare. Together with more stringent restriction of access to medical services and treatments including
drugs, these measures would inevitably result in a contraction of the US pharma market.
The short-term versus medium- to long-term effects of the reform on pharma are explored in Figure 14, together with
strategies which pharma can implement to maximize drug sales.
Figure 14: Cost-containment pressures on pharma in the US will intensify in the long term
Increased health insurance coverage
12 years original biologics exclusivity
No drug reimportationfrom Canada
Reform measures Medium-term impact Long-term impact
Higher generics use
Some biosimilars use
Lifecycle management more important but
strategies less effective
Better pharmacoeconomic data to support value
proposition
Medicare price negotiation
Grow volume at a cost of lower price
Higher sales volume
Longer patent protection for biologics
Pharma strategies
Development of biobetters / branded pharma enters the
biosimilar arena
Drug reimportation could be allowed leading to lower
sales and downward price pressure
No undercutting by parallel trade or pressure to
decrease prices
Introduction of tools to encourage substitution with
biosimilars
Pricing pressure from payers – Medicare drug discounts and increased
Medicaid rebates
Discounts and higher rebates offset by volume growth
More pricing pressure from payers
Support for comparative effectiveness research
but results not to be used to restrict services
Comparative effectiveness research has limited impact
Comparative and cost effectiveness research used for reimbursement decisions
Faster biosimilars uptake then expected
Generics volume uptake near maximum
Cost-containment pressures leading to greater use of gatekeepers, treatment
rationing
Source: Datamonitor D A T A M O N I T O R
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Healthcare reform has already had an impact on pharma in 2010
Certain healthcare reform measures have already been enacted (in 2010). For example, seniors reaching the Medicare
Part D coverage gap were entitled to a $250 rebate in 2010, while the major change to Medicare Part D will be the 50%
discount required for brand-name drugs in the coverage gap in 2011 – a move which saved seniors $38m in the first 2
months of 2011 alone (Taylor, 2011b). The increase in Medicaid discount from 15.1% to 23.1% in 2010 has also impacted
US pharma.
As a result, a number of pharma companies have already stated that sales losses in 2010 were partly due to these
measures, with the industry having to wait until 2014 before it sees the upside to the reforms, primarily the expansion of the
insured population.
Figure 15 lists the key healthcare reform measures most relevant for the pharmaceutical industry in 2010.
Figure 15: Timeline of key healthcare reform measures in the US, 2010
2010
Medicare• $250 rebate to Medicare beneficiaries who reach the Part D coverage gap in 2010
Medicaid• States have the option to cover childless adults and expand coverage for other eligibles
• Medicaid drug rebate for brand name drugs increased from 15.1% to 23.1% (17.1% for clotting factors and drugs approved for exclusive pediatric use), 13% for generics, extend rebate to Medicaid managed care plans
Other• FDA is authorized to approve biosimilars and original biologic manufacturers are granted 12 years
of market exclusivity
• Support comparative effectiveness research by establishing a non-profit Patient-CenteredOutcomes Research Institute
Insurance Reforms• Temporary national high-risk insurance pool established to provide health coverage to individuals
with pre-existing conditions until 2014
• Dependent coverage expanded for adult children up to age 26
• Ban lifetime coverage limits on dollar value of coverage
• Ban insurers from rescinding coverage expect in cases of fraud
• Ban pre-existing condition exclusion for children
• Medical loss ratio of at least 85% for large group plans and 80% for individual and small group markets
• Establishment of a process for reviewing insurance rate increases
Source: Datamonitor D A T A M O N I T O R
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Figure 16 lists the key healthcare reform measures most relevant for the pharmaceutical industry in 2011.
Figure 16: Timeline of key healthcare reform measures in the US, 2011
Medicare• Require pharmaceutical manufacturers to provide a 50% discount on brand-name prescriptions
filled in the Medicare Part D coverage gap and begin phasing-in federal subsidies for generic prescriptions filled in the coverage gap
Other• Impose new annual fees on the pharmaceutical manufacturing sector in the form of excise tax
2011
Medicare• Begin phasing-in federal subsidies for brand-name prescriptions filled in the Medicare Part D
coverage gap to reach 25% in addition to the 50% manufacturer brand-name discount
Medicaid• Increase Medicaid payments for primary care doctors for 2013 and 2014
Other• FDA is authorized to approve biosimilars and original biologic manufacturers are granted 12 years
of market exclusivity
• Support comparative effectiveness research by establishing a non-profit Patient-CenteredOutcomes Research Institute
2013
Insurance Reforms• Create the Consumer Operated and Orientated Plan (CO-OP) program to foster the creation of
non-profit, member-run health insurance companies to offer qualifying health plans
Source: Datamonitor D A T A M O N I T O R
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Figure 17 lists the key healthcare reform measures most relevant for the pharmaceutical industry from 2014.
Figure 17: Timeline of key healthcare reform measures in the US from 2014
Insurance Reforms• Creation of state-based American Health Benefit Exchange and Small Business Health Options
Program Exchanges (non-profit or government run) through which individuals and small businesses (less than 100 employees) can purchase qualified coverage
• Require guaranteed issue and renewability and allow rating variation based only on age (limited to 3 to 1 ratio), premium rating area, family composition and tobacco use.
• Provide subsidies for out-of-pocket limits for those with incomes up to 400% FPL
• Limit deductibles for health plans in the small group market
• Creation of an essential health benefit package
• Permit states the option to create a Basic Health Plan for uninsured individuals with incomes 133-200% FPL
• Provide premium credits and cost sharing subsidies for individuals and families with incomes 133-400% FPL who purchase insurance through exchanges
• Impose fees on the health insurance sector
Medicare• Establishment of an Independent Payment Advisory Board comprised of 15 members with the
remit of submitting legislative proposals containing recommendations to reduce growth in Medicare spending if spending exceeds a target growth rate
Individual and Employer Requirements• Require all US citizens and legal residents to have qualifying health coverage or pay a penalty
• Impose a fee for qualifying employers not offering health insurance coverage whose employees receiving federal premium tax credits
• Require employers with more than 200 employees to automatically enroll employees into health insurance plans offered by the employer.
2014
Medicaid• Expansion of Medicaid to all non-Medicare eligible individuals under age 65 with incomes up to
133% FPL
Other• Impose an excise tax on insurers of employer-sponsored health plans with aggregate values
exceeding $10,200 fore individuals or $27,500 for family coverage (effective from 2018)
2015 and later
FPL = federal poverty level
Source: Datamonitor D A T A M O N I T O R
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Will the healthcare reform law be repealed?
Now that the Republicans are in control of the House of Representatives (since January 2011), they are in a stronger
position to fight for repeal of the healthcare reform. However, while a total repeal is unlikely, Republicans could also adopt
different strategies to slow down healthcare reform implementation, through lobbying and litigation on a state-by-state
basis, or through affecting financing of the implementation through the appropriations bills that release funding for each
year. In order to achieve this, however, they either need control of both the House and Senate, or to win over several
Democrats (Lambert, 2010a).
For example, a judge in Virginia has already ruled a key element of the law – that which obliges people to purchase health
insurance – as unconstitutional. Elsewhere, 20 states have together filed a lawsuit that argues that making people buy
health insurance goes beyond the reach of the Commerce Clause of the Constitution (which grants the federal government
authority to regulate commerce between states). However, the lawsuit is unlikely to reach the US Supreme Court for this
year, while a federal court in California has already dismissed the lawsuit (Lambert, 2010c). Also, in late January 2011, the
House Republicans voted to repeal the healthcare reform law in a 245-189 majority (winning over three Democrats) (Yin,
2011c). That said, the repeal is largely symbolic, since even if it were passed the Senate would likely meet with a
Presidential Veto.
Meanwhile, a bipartisan bill put forward in 2011 proposes to allow states to opt out of certain requirements of the federal
healthcare reform law in 2014 instead of 2017, if they meet minimum coverage benchmarks. States could apply for waivers
from some of the obligations of the reform, including the employer penalty for not providing coverage, the individual
mandate, the standards for a basic health insurance policy and the health insurance exchange structure. However, states
would have to demonstrate that their coverage would meet the reform law’s minimum coverage and affordability
requirements. As such, the proposal would give more conservative states free reign to try more market-based methods,
while more liberal states that do not find the law bold enough could try public options (Yin, 2011b)
In response to continued repeal efforts by Republicans, Democrats are fighting in defense of the reform, pointing out that its
benefit to patients is already apparent. The Democrats stated that undoing the law would increase the number of uninsured
and put insurers back in control of health insurance, allowing them to increase premiums at will, ultimately leading the
federal budget deficit to grow more quickly (Yin, 2010f). Furthermore, the US government’s Department of Health and
Human Sciences argues that a repeal would represent a large step backwards, stating that it would add $1 trillion to the
deficit over the next 10 years and deny coverage to 32 million US citizens. However, according to the non-partisan
Congressional Budget Office, a repeal would add an estimated $230bn to the deficit between 2012 and 2021, although the
Republicans argue that these estimated costs are flawed because the reform legislation was misleading. The
Congressional Budget Office believes that attempts to cut the deficit and repeal the health reform are contradictory (Yin,
2011d). While Pharmaceutical Research and Manufacturers of America (PhRMA) does not believe a repeal will take place,
it does, however, appreciate some aspects that it would address: specifically those that negatively impact pharma. For
example, it would like to see the Medicare Payment Advisory Board removed, as it presents a future threat to free drug
pricing in the US. Also, it would like to see the removal of the provision that requires businesses to file tax forms on
transactions worth over $600. However, PhRMA does acknowledge that it may be difficult to remove some aspects of the
health reform law without inadvertently causing the entire reform to collapse (Staton, 2010). This is particularly the case for
the insurance coverage mandate, which is expected to be beneficial for pharma sales.
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Potential impact of healthcare reform on pharmaceutical sales
While many factors will determine the financial impact of proposed US health reforms on the branded pharma industry,
including how healthcare reform law will be interpreted, Datamonitor has developed a crude quantitative model depicting
how the pharma market could be affected. The model demonstrates that imposed discounts and rebates, in addition to
raised industry fees, will lead to a short-term market dip that will be offset by the increased sales volume resulting from the
newly insured individuals from 2015 onwards.
The base case model indicates that pharma companies’ revenues in the US will suffer in the first 4–5 years after the reform
enactment due to increased Medicaid rebates and Medicare Part D donut-hole discounts, measures that will be effective
immediately or soon after passage of reform law. However, from 2015 onwards, revenues will rise, driven mainly by the
increase in the number of insured and the resulting increased drug consumption.
Interestingly, the downsides of the reform will hit pharma at the worst time, amid a patent cliff that will also have a negative
impact on the US branded pharmaceutical market.
Figure 18: Base case scenario in the US: short-term pain is offset by medium-term gain under health reform
(non-elderly population accounts for 66% of the total pharmaceutical market)
165
170
175
180
185
190
195
200
205
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Sale
s ($
bill
ion)
Total US nonelderly market without reformTotal US nonelderly market under reform
Source: Datamonitor, PharmaVitae Explorer, January 2010, company-reported information D A T A M O N I T O R
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Healthcare systems globally are converging towards a similar model
Over the past few decades, driven by increasing demand and patient expectations, as well as use of more expensive
therapies and services, healthcare expenditure growth has become unsustainable: a situation that is also exacerbated by
the global economic downturn that has led to a squeeze on public purses, creating a healthcare funding crisis. As a result,
developed markets are transitioning decision-making power from physicians to payers (although in the UK, this trend will be
reversed going forward), which now have to make some very difficult and often unpopular decisions regarding patient
access to services and new treatments.
Several key markets in Europe utilize strict pharmacoeconomic guidelines when evaluating the cost-effectiveness of new
treatments, and as a result have decided to not to fund certain new expensive biologic drugs that extend life of cancer
patients by just a few months. For example, the National Institute for Health and Clinical Excellence (NICE) rejected Avastin
(bevacizumab; Roche) for metastatic breast cancer in 2011 and Herceptin (trastuzumab; Roche) for gastric cancer in 2010.
However, where the UK is concerned, this could change in the future as physicians start to take the decision-making away
from NICE.
This has led to the introduction of risk-sharing agreements (seen across Europe, the US, and Australia) between payers
and pharma as a means for such expensive treatments to gain market access. Similarly, patient top-up fees are also an
option to balance patient access and payer budgets and are already in operation in several countries such as France and,
to an extent, the UK. Such moves signal the way of things to come, namely the shift of both more cost and responsibility for
healthcare onto patients (in terms of taxes, insurance premiums, co-pays, and direct out-of-pocket costs) as well as private
health insurers.
In effect, going forward, there will be a greater convergence between different healthcare models of today, namely the
largely publicly funded healthcare systems of Europe with the predominantly privately funded US healthcare system, with
major change set to take place over the next 10 years (PM Live, 2011). Nevertheless, public healthcare systems will remain
focused on providing core services and those that are seen as most cost-effective or serving the needs of the larger
proportion of the population. Decisions of which services will be covered will be driven by what provides the best value as
well as which services individuals can or will want to pay for out-of-pocket. Many of those decisions will be driven by
different societal views of what is acceptable or expected in different countries. The expected convergence of healthcare
systems in Europe, the US, and the emerging markets are shown in Figure 19.
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Figure 19: Healthcare systems in Europe, the US and emerging markets are likely to converge
Europe• Mainly publicly funded healthcare
• Private health insurance complements the public health system
• Low out-of-pocket expenditure
• Payers have growing decision-making power
• Moderately empowered patients
US• Mainly privately funded healthcare
• Private insurance has a major role but public healthcare provision set to grow under healthcare reform
• Medium out-of-pocket expenditure
• Payers have growing decision-making power but physicians are still independent
• Empowered patients
Emerging markets• Underdeveloped but growing public healthcare systems
• Nascent private health insurance
• High proportion of out-of-pocket expenditure
• Upper and middle class patients are more empowered
Future model• Mix of public and private funding for healthcare
• Medium out-of-pocket expenditure
• Empowered patients
• Payers have key decision-making powers but physicians’and patients’ needs also need to be addressed
• Treatment value key for reimbursement (within a treatment pathway)
• Disease management programs and personalized medicine have an advantage
Source: Datamonitor D A T A M O N I T O R
Closes payer-pharma relationships set to evolve
With the influence of payers set to grow even further, pharma’s relationship with them will also intensify, with payers
increasingly consulted on the development of a company’s portfolio and pipeline. This will have a dual purpose: firstly it will
allow pharma companies to prioritize projects and make go, no-go decisions based on payers’ needs and preferences.
Secondly, it will help payers plan expenditures for treatments and services that will become available in the future. As such,
there will be greater transparency between pharma and payers particularly regarding evidence to support a drug’s value
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proposition that will drive reimbursement decisions. In fact, some companies are already engaging in closer relationships
with payers. GlaxoSmithKline, for example, has showcased its pipeline to a number of payers in an effort to gain a better
insight into their needs and shape its pipeline strategy accordingly (Whalen, 2008). Furthermore, the current trend towards
drug price negotiation (between pharma and payers) is expected to continue. However, pricing decisions will increasingly
look to integrate the cost and value of the whole treatment package, such as outpatient costs for infusions and nurse
support, rather than simply covering the cost of the drug.
Disease management will become central to payer decisions
Disease management will become central to payer decisions, and companies able to offer such comprehensive treatment
solutions will have an advantage. Recognizing this, Roche (building upon its "twin-pillared" structure of pharmaceuticals
and diagnostics) acquired US-based diagnostics company Ventana Medical Systems in 2008, thereby enhancing its ability
to deliver personalized healthcare solutions to fit with its long-term growth strategy, while Novartis is set to acquire
Genoptix, a laboratory that offers personalized diagnostic services (Sutton, 2011). In fact, twinning diagnostics with
therapies (targeted therapies) designed to work in specific patient populations will continue to be attractive to payers as
they present lower risk in terms of investment.
Pharma will need to manage both patient and payer expectations
With greater cost of healthcare to be footed by patients, the current patient empowerment trend is also expected to
continue, with patients taking greater interest and responsibility in their healthcare choices, including drug treatments.
Consequently, going forward, pharma will have to consider not only physician and payer needs and expectations, but also
patient preferences. However, due to the differing needs of these stakeholders, managing expectations will not be an easy
task.
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Several key markets are decentralizing healthcare decision-making to increase efficiency
Another key reform strategy among many healthcare systems, particularly in Europe, has been improving efficiency and
performance through decentralization: transferring more authority and power from central bodies which have traditionally
managed most aspects of healthcare to the smaller, regional centers. The decentralized bodies are generally either publicly
operated institutions (tax-funded countries), non-profit private bodies (such as sickness funds in social health insurance
markets), or profit-making, publicly listed companies. This is intended to reduce bureaucracy and make healthcare systems
more dynamic and able to respond to both national and local agendas (European Observatory on Health Systems and
Policies Series, 2007).
However, the European Observatory on Health Systems and Policies Series (2007) has stated that countries may need to
consider recentralizing since it is becoming more apparent that certain pressures can only be adequately addressed
centrally by national bodies. This raises questions as to whether decentralization may just be a trend of the moment rather
than a permanent fixture.
Figure 20 shows the major drivers of decentralization of healthcare systems and how these can impact on both pharma and
patients in positive and negative ways.
Figure 20: Key drivers and consequences of healthcare system decentralization
• Inequalities in treatment provision
• Risk of lack of coordination and efficiency
• Risk that patients will ‘shop around’, which can increase burdens on the best healthcare facilities, thus lowering their quality and efficiency
• Fragmented pricing and reimbursement system
ConsequencesConsequences
• Care becomes more patient-specific as it can be tuned to patients’ needs and patients have more choice
• Better quality and more malleable health services
• A negative reimbursement decision does not impact a whole country
Improving healthcare system efficiency and
performance by handing responsibility to smaller
organizations
Cost savings can be achieved by removing
unnecessary bureaucracy
More dynamic, local decision making
Greater choice for patients (e.g. UK proposals to form
GP consortia to commission services for patients)
Key drivers of decentralization
Positive Negative GP: General Practitioner
Source: Datamonitor D A T A M O N I T O R
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UK’s decentralization strategy has raised concerns regarding inequality of access to healthcare services
In the UK, the impending devolution of powers from the primary care trusts (PCTs) and the National Institute for Health and
Clinical Excellence (NICE) to general practitioners (GPs) heralds a major change in terms of management of frontline
services. Under the reform proposals, general practices will be required to form consortia when commissioning services for
their patients, utilizing their allocated government funds, calculated on a per patient basis.
Like most decentralization strategies, this is intended to save costs by removing unnecessary bureaucracy, provide more
choice to patients, and adapt healthcare services to local patients’ needs (Noir, 2010). The existing 152 PCTs will be
replaced by 300–350 GP consortia nationwide (Ireland, 2011). However, there are fears that the strategy will lead to
massive inequalities in treatment provision across the UK, an exacerbation of postcode prescribing that NICE was tasked
to remove. In fact, a recent survey has shown there is a great variation in the uptake of NICE-approved medicines between
PCTs, a situation that the industry and other stakeholders believe may only become worse following decentralization
(Bruce, 2011b). There is also the risk that patients will "shop around" for services, although patient satisfaction with a GP
may not necessarily correlate with the advice or treatment they receive (Noir, 2010), as well as potentially creating a higher
workload burden and thus longer waiting lists for “proffered” physicians.
From a pharma industry perspective, the dissolution of PCTs and strategic health authorities (STAs) means that companies
will have to target many more stakeholders in the future with regards to drug reimbursement issues, since reimbursement
decisions will be made on a local basis. This will increase the complexity and burden of achieving market access for a
given drug within the UK, with pharma likely to now have to consider repopulating its primary care sales forces following the
recent cuts in size. However, on the positive side, a negative reimbursement decision in one region will not necessarily
impact the whole country.
Italy has already devolved many powers to regions causing inequality in access to care and treatments
In contrast to the UK, Italy already has a system of decentralized healthcare provision in place. The Servizio Sanitario
Nazionale (SNN, the country's national health service) has become increasingly decentralized since 1997, with many of the
Ministry of Health’s responsibilities having been devolved to the 20 regional governments. This has given the regions
powers to ensure that healthcare policy is delivered and to distribute financial resources to a network of local health
authorities (Aziende Sanitarie Locali; ASL) and hospitals. Regional health departments have the power to adopt their own
additional quality standards, to set their own reimbursement rates, to decide which hospitals should receive public funds,
and to withhold reimbursement if hospitals did not meet the required standards (Stancati, 2010).
However, the devolution of such responsibilities has led to the evolution of a number of regional disparities in Italy. For
example, while the northern regions have been assertive in exploiting their independence, most of the southern regions
have trailed behind in their reforms and face a shortage of “own-source” resources (European Observatory on Health
Systems and Policies, 2009). Fewer treatments as well as fewer hospital beds (1.3 fewer than in the North in 2002) are
available in the South, which critics claim leads to the poorest people receiving the poorest standard of healthcare
(Stancati, 2010; Maio et al., 2002).
Decentralization also presents a challenge in terms of drug pricing and reimbursement, since regions develop their own
formularies and drug prescribing groups, providing a further level of complexity for pharma (Kars 2006). Furthermore, in
addition to the Italian Medicines Agency (AIFA) list of centrally approved medicines, each region has its own separate drug
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list, with variation in drug access between hospitals even within a region (Galbraith, 2010a). Nevertheless, the central and
regional governments and autonomous provinces have recently agreed to make innovative drugs available to all patients
as soon as the reimbursement decision is made, helping reduce delays in drug access in poorer regions (Taylor, 2010f).
Brazil, Russia, and China are also engaging in decentralization strategies
Decentralization strategies are not just limited to developed markets. In efforts to improve healthcare, emerging markets
have also sought to devolve responsibilities on a regional basis. In Brazil, an ongoing decentralization strategy has given
regional and local systems varying levels of managerial responsibility and financial autonomy (Elias and Cohn, 2003).
However, like Italy, there are disparities in healthcare coverage in Brazil and despite efforts to address geographical and
financial inequalities, the lack of access to healthcare for a significant proportion of Brazilians remains a serious challenge.
Similarly, Chinese healthcare regulatory bodies are also fragmented and decentralized, with multiple government (both
central and regional) administrations and institutions involved in different aspects of industry regulation, leading to a lack of
coordination and efficiency.
Following the break up of the Soviet Union, Russia’s healthcare system was also exposed to a new decentralized
administrative structure, with the country divided into federal, regional (oblast-level) and municipal (rayon-level)
administrative levels. This has led to significant disparities in the distribution of physicians and healthcare facilities with
heavily populated urban centers having better access to healthcare as well as poor access to healthcare for the poorer
regions of society. More recently, however, in 2010, there were signs that regional disparities could be ironed out, since
local governments had to draft modernization programs for their regions and submit them to the Ministry of Health by
October 1, 2010, with the approved programs receiving funding made available from the 2% ($16bn) increase in health
insurance premiums. Modernization will involve: bringing regional healthcare infrastructure into line with the population size,
disease incidence, and mortality patterns; upgrading equipment; providing better information technology systems such as
electronic patient records; and improving the provision of treatments covered by the mandatory health insurance to patients
(Bailey, 2010b).
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REGULATORY ISSUES
Regulatory changes have a largely negative impact on pharma
Pharmacovigilance issues and the need for greater transparency in terms of regulatory processes are straining the
relationship between regulators and pharma, ultimately increasing drug development and approval processes, in addition to
placing further emphasis on post-approval drug monitoring at the expense of pharma.
Heightened safety concerns continue to impact pharma
A heightened focus on drug safety in the US and EU continues to have an impact on drug developers, and nowhere are
delays more prominent – and the impact on drug approvals more apparent – than in the US. Powers given to the US Food
and Drug Administration (FDA) by the FDA Amendments Act of 2007, including rights to require post-marketing safety
studies and Risk Evaluation and Mitigation Strategies (REMS), are increasingly impacting on pharma. As the FDA and the
drug developers grapple with these new requirements, it is taking longer to approve drugs, despite more funding and
expanded capacity at the agency.
Figure 21 shows how growing regulatory pressures are negatively impacting on pharma.
Figure 21: Pharma has had to grapple with growing regulatory pressures
Regulatory burdens have negative consequences for Pharma
Regulatory burdens have negative consequences for Pharma
Greater focus on pharmacovigilance may increase costs and bureaucracy and lead to more drug withdrawals and restrictions
Increased transparency of regulatory processes may result in regulators
toughening up on Pharma to prove their public service
Greater focus on pharmacovigilance may increase costs and bureaucracy and lead to more drug withdrawals and restrictions
Greater focus on pharmacovigilance may increase costs and bureaucracy and lead to more drug withdrawals and restrictions
Increased transparency of regulatory processes may result in regulators
toughening up on Pharma to prove their public service
Increased transparency of regulatory processes may result in regulators
toughening up on Pharma to prove their public service
Closer collaboration between regulators in different markets could lead to spread
of approval restrictions
Heightened focus on drug safety may lead to more enforcement actions,
market withdrawals and longer approval times
Closer collaboration between regulators in different markets could lead to spread
of approval restrictions
Closer collaboration between regulators in different markets could lead to spread
of approval restrictions
Heightened focus on drug safety may lead to more enforcement actions,
market withdrawals and longer approval times
Heightened focus on drug safety may lead to more enforcement actions,
market withdrawals and longer approval times
Source: Datamonitor D A T A M O N I T O R
For drugs already launched and available in the US, the FDA is not afraid of clamping down on companies that promote off-
label prescribing. Indeed, a greater number of enforcement actions could come about in 2011 (Moskowitz, 2010). In
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addition, the pharmacovigilance system, known as Sentinel (Sutter, 2009), will add to the growing regulatory burden on
pharma companies, since developers are required to increasingly navigate hurdles not only before they secure approval,
but also post-approval.
The FDA is placing an increased emphasis on safety controls
The FDA is tightening safety controls, with new rules on safety studies for diabetes drugs placing pressure on pharma.
Concerns about the increased cardiovascular risk with diabetes drug Avandia (rosiglitazone; GlaxoSmithKline) prompted
the FDA to require new consent forms for patients and new standards for doctors when writing prescriptions (Carroll, 2010;
Maugh and Zajac, 2010).
Furthermore, the US Congress introduced a bill titled the Drug Safety Enhancement Act in 2010, which should give the
FDA the authority and resources to adequately carry out its regulatory functions. If passed, the bill will allow the FDA to
(Taylor, 2010c):
• create an up-to-date registry of all drug facilities
• generate funding for increased good manufacturing practice (GMP) inspections for branded and generic drugs
• require parity between domestic and foreign inspections
• prohibit entry of drugs that limit, delay, or deny FDA inspections
• prohibit drugs that lack safety documentation
• require manufacturers to have knowledge on the supply chain and mitigate security risks throughout the chain
• prohibit false or misleading reports to the FDA
• provide strong new enforcement tools such as mandatory recall authority
• protect those who bring attention to important safety information
• require unique identification numbers for drug establishments and importers to improve the FDA’s ability to identify
parties involves in a serious situation more quickly
Greater emphasis on drug safety is also apparent in the emerging markets. For example, in February 2009, Brazil
introduced a pharmacovigilance system in order to improve adverse event reporting for drugs already on the market, and
for the first time outlined the procedures and responsibilities required of pharma companies when reporting adverse events
(ANVISA, 2009).
However, the pressing need for greater transparency of the regulatory processes and decisions is straining the regulator-
manufacturer relationship, with the regulators increasingly needing to be seen as taking a hard line with the pharma
companies to prove their public service. Consequently, pharma is put under increasing scrutiny with a tightening grip on
marketing practices requiring them to change their promotional models.
Greater focus on pharmacovigilance in the EU brings mixed blessings
Pharmaceutical companies have to some extent welcomed new EU pharmacovigilance obligations, which came into effect
on January 1, 2011. Companies and member states are required to report suspected adverse reactions to the EU
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pharmacovigilance database, EudraVigilance, which will then forward reports to the member states where the adverse
event occurred. This means that the periodic safety report which companies are required to submit to EudraVigilance now
requires analysis of a drug’s risk/benefit profile rather than lists of individual case reports already submitted to
EudraVigilance. This is intended to improve the detection and reporting of adverse drug reactions in the EU. In addition,
marketing authorization holders will only need to submit key elements from the pharmacovigilance system they set up for
their products rather than detailed descriptions of the system, thus saving companies time (Schofield, 2010a).
However, pharmaceutical companies still have reservations about other aspects of the new EU pharmacovigilance system.
For example, the European Commission (EC) will have powers to force companies to perform post-authorization safety and
efficacy studies, either during or post-product approval, so that the product can be better assessed in medical practice. For
obvious reasons, the pharma industry would prefer this not to become routine, and rather it be used in exceptional
circumstances. Companies also face conducting further monitoring for specific products, including all drugs with a new
active substance and biological products, including biosimilars. This will certainly increase costs and workload for both
pharma companies and regulators, and could in turn be reflected in high industry approval fees. However, the provisions
are not expected to significantly impact pharma until mid-2012, when they will become compulsory, although member
states have the option of implementing the provision now (Schofield, 2010b).
The EU pharmacovigilance obligations form part of new legislation that has been adopted by member states, which is the
first part of the “pharmaceutical package” to be approved. Another part of the legislation includes the adoption of a new
Pharmaceutical Risk Assessment Committee at the European Medicines Agency (EMA), which will analyze signals of new
risks or changes to benefit/risk balance and issue recommendations to change, suspend, or revoke marketing applications
which will then forward results to the Committee for Medicinal Products for Human Use for its opinion and decision. The
new legislation also states that steps will be taken to make it easier for patients and healthcare professionals to report
suspected adverse reactions to medicines and the commission will analyze the readability of patient information leaflets
and summaries of product characteristics and potentially draw up proposals for improving their layout and content
(Schofield, 2010b).
Collaboration between the FDA and EMA is intensifying
In response to the ever-increasing globalization of drug development and manufacturing, the FDA and its European
counterpart, the EMA, are continuing to strengthen their ties. In September 2010, the two regulators extended signed
confidentiality agreements that they first signed in 2003, and as a result they now share the following information (PM Live,
2010b):
• good clinical practice (GCP) inspection reports of clinical trial sites
• drafts of pending laws, regulations, and guidance documents
• Post-marketing data and information potentially affecting public health
• information about defects or recalls known by one agency to have been manufactured or distributed in the other
agency’s territory.
The emphasis of the collaboration is on harmonizing standards, sharing information, and eventually spreading the workload
(e.g. inspections and other regulatory activities). In order to facilitate the collaboration, an FDA liaison official has been
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present at the EMA since June 2009, with an EMA liaison official at the FDA since January 2010. Collaboration now takes
place on a daily basis, with an average of 55 interactions per month via video- or teleconferences, staff exchanges, and
document exchanges (Moskowitz, 2010).
Other forms of collaboration between the FDA and EMA include the pilot program to share information on GCP to ensure
uniformity between clinical trials performed for marketing applications in the US and the EU (Sutter 2009). In addition, the
EMA and the FDA announced in February 2010 that they were to accept a single Orphan Drug Designation Annual Report
for products designated in both jurisdictions (Sharma, 2010b).
While any convergence of the pathways between the two regulators could cut development times and costs, greater
communication between the two regulators does not directly translate into identical approval decisions for pharma, with
varying levels of acceptable risk and different legislative practices seen across the two markets. For example, while the
FDA and the EMA reviewed the same data on the diabetes drug Avandia (rosiglitazone; GlaxoSmithKline), the EMA
suspended the drug, while the FDA merely placed restrictions on its use (Moskowitz, 2010). Similarly, with regards to the
breast cancer drug Avastin (bevacizumab; Roche) and its use in metastatic HER2-negative breast, the FDA recommended
that the indication be removed after determining that the risks of the drug outweigh the benefits. Conversely, the EMA
stated that Avastin will remain approved for use in combination with paclitaxel in Europe, citing evidence of clinical benefit
based on progression-free survival (Evernow Publishing, 2010).
As such, although the greater collaboration between regulators will ultimately be beneficial for pharma through the
streamlining of development and approval requirements, thereby reducing costs, in the short term it could lead to
broadening of approval restrictions across multiple markets.
EU ban on direct-to-patient communication guidelines partially relaxed
More positive news for pharma is that the European Commission’s (EC) Pharmaceutical Legislation package (proposed in
December 2008) included provisions for relaxation of rules for direct communication between pharmaceutical
manufacturers and patients. In November 2010, after much discussion and a significant opposition from members of
parliament, the European Parliament backed the EC’s proposals to relax pharma-consumer communication. Manufacturers
may now communicate directly with those patients who explicitly seek information, although communication must be limited
to advice provided in patient information leaflets, and confined to issues of price, adverse events risk, and general disease
awareness. The impetus for the change in law stemmed from a need to provide objective, high quality, non-promotional
information to an increasingly empowered patient population, in a bid to protect patients from encountering misleading or
poor quality information (Adams, 2010a). That said, this is offset by the fact that the rule preventing dissemination of
information on prescription medicines through television and radio has now been extended to print media (previously
communication through health-related publications and internet sites was allowed) (Adams, 2010a).
However, critics have highlighted the absence of a clear distinction between information and advertising, fearing that it
would encourage patients to demand branded drugs even if cheaper generics are available (Adams, 2010a). The final
version of the proposal (that was approved in November 2010) was rephrased to clarify the distinction between information
and advertising and to emphasize that companies cannot make available any promotional material on prescription drugs.
The final version of the Pharmaceutical Legislation package states that companies will have to make public assessment
reports publically available, and that companies provide, where appropriate, information in the form of responses to
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individual requests for information, or through health-related publications – this will apply in situations such as when
patients have no or limited access to the Internet. Companies can also voluntarily provide other information such as data on
preclinical and clinical studies contained in the public assessment reports featured on the EU web portals that will be set up
by member states. Pharma could also provide information on the disposal of unused drugs; medicine prices, and adverse
reaction data, as well as information on non-interventional scientific studies of a product. However, this would need to be
checked by the regulator (Schofield, 2010b).
Realistically though, while the changes have fallen considerably short of US-style direct-to-consumer (DTC) advertising,
and have provided manufacturers with little opportunity to promote individual drug products in the EU, manufacturers would
do well to seize any concessions in this area given the historical dearth of such options in the EU.
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Developed markets exhibit a stable intellectual property environment
Figure 22 illustrates the market and data exclusivity processes in the US and the EU.
Figure 22: Market and data exclusivity for New Drug Applications and Biologic License Applications in the US
and the EU
NDA: New Drug Application
Market and data exclusivity
Generic application after 4 years if application contains a certification of patent invalidity or non-infringement (Paragraph IV filing)*
3 years 6 months
Abbreviated NDAsor No 505b2 applications receive 3 additional years
Pediatricexclusivity is an additional 6 months
US: Original drugs
5 years
12 years
US: Original biologic drugs
Manufacturers of biologic drugs get at least 12 years exclusivity As with NDAs, 6 months pediatric exclusivity is included
6 months
2 years
Data exclusivity Market exclusivity
Branded product receivesnew license
Generics application Generics launch
* = Additional market exclusivity if new indication is registeredd in first 8 years
EU: Original drugs
8 years 2 years 1 year*
Market and data exclusivity
Source: Datamonitor D A T A M O N I T O R
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It is generally easier to secure patent protection in the US than in the EU
New Drug Applications (NDAs) in the US are only awarded 5 years of data and marketing exclusivity in total. As such,
patent protection in the US is much more important than in Europe, since market exclusivity tends to expire before patents
do. It is also easier to secure patent protection in the US, as the US Patent and Trademark Office which handles patents is
generally less stringent than the European Patent Office (EPO), at least when it comes to accepting the scope of claims.
This also makes the timeframe for examining applications and obtaining allowable claims in the US significantly shorter
than in the EU, so that it is common to have claims allowed in the US before receiving a first examination report for the
corresponding EPO application (Managing International Property, 2009).
In addition, a 3-year period of exclusivity is granted for Abbreviated New Drug Applications (ANDAs) or 505(b)(2)
applications. These relate to a drug product that contains an active moiety that has been previously approved, when the
application contains reports of new clinical investigations (other than bioavailability studies) conducted or sponsored by the
sponsor which provide a new basis for approval, such as a new strength, dosage form, route of administration, or
conditions of use (US Food and Drug Administration, 2010c). Pediatric exclusivity of 6 months is added to the 5 or 3 years
of new drug product exclusivity if these have been conducted in accordance with the requirements.
Branded biologics in the US are eligible to receive 4 years' data exclusivity and 12 years' market exclusivity (Edwards et al.,
2010). This means that once the biosimilar pathway is up and running, biosimilars developers will be able to submit their
application 4 years after the original product’s approval (once the 4 years' data exclusivity is up), well in time for launch
once the 12-year period has lapsed, provided there are no patent issues. However, the issue of exclusivity is currently
under further debate in the US by a number of House of Representative members who believe that with a period of data
exclusivity, the US Food and Drug Administration (FDA) could not begin a review until the 12 years is up. Such a move
would delay biosimilar producers' time to market (FDA Week, 2011). The US president stepped into the argument when in
February 2011 he announced that he wished to shorten market exclusivity to 7 years from 12 years (Staton, 2011), thus
reducing the timescale for biosimilars to enter the US market. Clarification as to the meaning of exclusivity periods with
reference to FDA reviews is expected in the near future.
The EU follows the 8+2+1 rule
In the EU, the 8+2+1 rule applies to all new chemical entities approved by any member state by any procedure. This means
that such entities have 8 years of data exclusivity, with a further 2 years of market exclusivity. This 10-year exclusivity can
be extended by an additional year if, during the first 8 years, the marketing authorization holder obtains an authorization for
one or more indications that will bring a significant benefit compared with existing therapies. This means that companies
can apply for generic authorization after year 8, but a given generic version of a drug may not be marketed until after year
10 or 11 (European Generic Medicines Association, 2010).
Japan gives branded pharma companies 8 years of data exclusivity through re-evaluation requirement
Japan has a "re-evaluation period" which serves as a form of data exclusivity protection in the absence of an explicit data
exclusivity period. The period of data collection is 8 years, but generics manufacturers must wait until after the 8 years have
passed before they file for approval of generic versions of drugs even if patents on the originals have expired, since they
are required to submit the same data (or rely on the original data) (VOI, 2009).
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The purpose of the re-evaluation (re-examination) is to confirm the safety and efficacy of new drugs through post-marketing
surveys. All drugs, including those that have completed re-examination, must undergo re-evaluation to reassess their
efficacy, safety, and quality. For certain medicines, the re-examination period can be extended from the conventional 6
years to a maximum of 10 years for drugs and from 4 years to a maximum of 8 years for medical devices (JPMA, 2010).
The re-examination period can also be extended for a set period not exceeding 10 years in cases where drug
manufacturers include data on pediatric clinical trials.
Springboarding allows generics manufacturers to access branded drug data in Australia
Data exclusivity in Australia protects innovator brands for 5 years. However, "springboarding" is permitted, whereby a
generics manufacturer accesses data lodged by the Therapeutic Goods Administration (TGA) during the data exclusivity
period in order to develop a product that will be available to market immediately once the primary patent has expired.
Although this was previously only allowed for patents that had been granted an extension, Australia was required to widen
the springboarding provisions to cover all pharmaceutical patents in order to comply with the Australia-United States Free
Trade Agreement (Finzi and Boyce, 2009). This brings Australia into line with the US, Europe, and New Zealand.
Loss of Plavix exclusivity in Germany is thought to be an exception
Despite the stability and strength of patents and exclusivity in developed markets, one exception has been the high profile
case of a “near generic” entry in Germany in 2008, when ratiopharm (now part of Teva) and Hexal (part of Sandoz)
launched a near copy of Plavix (clopidogrel; Sanofi-Aventis). Near generics – products with the same active ingredient as
the original drug but a slight difference in composition, usually the salt – are not subject to the same regulations regarding
patent infringement as they differ from the originator drug (Cleaver, 2009). In this case, ratiopharm's and Hexal’s versions
were clopidogrel besylate while the originator (Plavix) is clopidogrel bisulphate. The applicants secured approval of their
respective forms of clopidogrel through a bibliographic (established medicinal use) application from the German Federal
Institute for Drugs and Medical Devices (Bundesinstitut fur Arzneimittel und Medizinprodukte; BfArM) (Datamonitor,
Pipeline and Commercial Insight: Antithrombotics, December 2010, DMHC2636). The BfArM subsequently received an
infringement notice in mid-2008 since it was believed to have broken EU Community Law. Sanofi-Aventis is appealing the
ruling, but the near generics have been allowed to remain on the market (Cleaver, 2009).
The EU’s move to a single patent has been held up
Divergences regarding the validity of a patent can exist between national courts and the European Patent Office (EPO), but
these could be addressed with the implementation of an EU-wide patent system (formerly known as the Community Patent)
which would enable pharmaceutical companies to have a unified patent on a given product throughout the EU. The move
would also lead to a 10-fold reduction in the cost of an EU patent, ultimately benefiting the pharma industry. However,
proposals to allow the single patent were held up in 2010 by Italy and Spain, with Italy arguing that the Italian language is
being discriminated against by not being included as one of the official languages of the EU patent.
On December 14, 2010, in order to break an ongoing (10-year) deadlock, the European Commission (EC) made a formal
proposition that an "enhanced co-operation mechanism" be implemented to allow those European member states that
agree on the implementation of a single EU patent to move forward. While the European Parliament voted in this proposal
in February 2011 (Schofield, 2011), on the EU Court of Justice's announced on March 8, 2011 not to introduce a single EU
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patents' tribunal, meaning that the EU patent system remains devoid of a guaranteed litigation process, in a move that has
been viewed largely as a step backwards by the pharmaceutical industry, judges, and patent professionals.
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The intellectual property environments in the emerging markets are seen as inadequate
In the emerging markets, corruption is common and enforcement of intellectual property (IP) legislation is much weaker
than in developed markets. This acts as a disincentive for international pharmaceutical companies to launch innovative
products there.
The issues affecting IP in the emerging and growth markets are summarized in Figure 23.
Figure 23: Intellectual property environments in the emerging markets are characterized by problems
Corruption and conflicts
• In Russia there are high levels of governmental corruption so companies are often unsuccessful in patent infringement cases
• In Brazil the two agencies involved in approving patent filings, ANVISA and the INPI have differing opinions which can hold up approvals
• Despite the new patent law, India has refused several patents due to lack of sufficient innovation
Lengthy patent reviews and shorter protection periods
•In Brazil it takes 7-8 years to issue a patent due to shortage of patent examiners
•In China there are no extensions to compensate for the 3 years filings spend in regulatory reviews
Compulsory licenses
• In the past, Brazil has issued compulsory licenses, which forced branded companies to make drug price cuts
• The threat of compulsory licenses is ongoing in India as need to ensure drug availability to rising population increases
Inadequate data protection
• In India there is no statutory data protection for pharmaceuticals and reformulated brands may not necessarily receive protection
• In China the law on data protection is ambiguous and infringement is not adequately penalized
• In Russia new law (“On Circulation of Medicines”) failed to include provisions on regulatory data protection
ANVISA = Agencia Nacional de Vigilancia Sanitaria (The Brazilian National Health Surveillance Agency); INPI = National Institute of Industrial Property
Source: Datamonitor D A T A M O N I T O R
Russia’s intellectual properly environment is characterized by corruption
The Russian Patent Law is mostly consistent with provisions of the World Trade Organization’s (WTO's) Trade-Related
Aspects of Intellectual Property Rights (TRIPS) Agreement, although enforcement by the Rospatent (Federal Service for
Intellectual Property, Patents, and Trademarks) is insufficient. Furthermore, Russia has not signed up to TRIPS after a
string of longstanding disputes, while the lack of data exclusivity also remains an issue (WTO, 2010). Consequently, with
high levels of governmental corruption, even if an innovator company is successful in bringing the infringing party to court,
there is only a small chance of success with domestic companies treated favorably. Similarly, trademark infringement is
recognized, but as with patents, enforcement is limited (Thomson, 2005).
Russia enacted a new federal law on the circulation of medicines (titled “On Circulation of Medicines”) in September 2010,
which brought in a range of initiatives to improve drug quality, safety, and effectiveness. However, pharma has criticized the
bill for failing to include any provisions on regulatory data protection. Pharmaceutical Research and Manufacturers of
America (PhRMA) has stated that the bill should be amended so that drug applications which rely on innovator data or that
refer to original products (through bioequivalence studies) are prohibited for 6 years from the marketing approval of the
originator (Aisola, 2010).
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While it remains to be seen whether any improvement will be made, the pharma industry is hopeful that Russia’s desire to
join the WTO will push it towards making the necessary changes to its overall IP environment.
Patent reviews are slow in Brazil
In Brazil, one of the main issues that branded pharma faces is the slow progress of patent reviews. It is reported that it
takes 7–8 years to issue a pharmaceutical patent, with the delay primarily arising from a shortage of patent examiners
(Managing Intellectual Property, 2007). In addition, while Brazilian statute provides data protection against unfair
commercial use, it does not specify for how long, nor does it explicitly prevent regulators from using the data when
approving generics or similar applications. Conversely, the same law passed in December 2002 provides data protection
for pharmaceuticals for veterinary use, agrochemicals, and related products for 10 years for new chemical entities and 5
years for known compounds (Rizzotto, 2009).
Moreover, the drug regulatory agency Agencia Nacional de Vigilancia Sanitaria (Anvisa) rather than the National Institute of
Industrial Property (INPI) has the powers to make a final approval (or rejection) on pharmaceutical patent filings based on
its judgment of patentability. In reality, however, there is a severe conflict between the two agencies and they often refuse
to collaborate, particularly over how to assess applications for patents on incremental innovations (Shadlen, 2009).
INPI tends to favor incremental innovations, which are frequently lifecycle management strategies employed to maximize
the commercial potential of a branded drug and also to stimulate pharmaceutical investment, while Anvisa has a rather
different perspective. Being a government body and focused on containing healthcare costs, it believes that incremental
innovations are not inventions but discoveries that are intrinsic to the original molecule and should therefore not be patent-
protected. Thus the agencies often refuse to collaborate, particularly over how to assess applications for patents on
incremental innovations (Shadlen, 2009). Also, since 2002, the law in Brazil has exempted regulatory officers from having
to check whether a drug is still covered by a patent in Brazil, and so Anvisa has unwittingly issued several market
authorizations for generics, resulting in patent infringements (PhRMA, 2009).
Another cause for concern for pharma is the fact that Brazil has reserved the right to issue compulsory licenses in cases of
national emergencies. This threat gives the Brazilian government considerable leverage to achieve substantial savings,
even on patented drugs. A case in point is the difficulties the government had in covering the costs of antiretroviral
therapies and its subsequent resorting to threatening to issue compulsory licenses as a means of negotiating antiretroviral
prices. In May 2007, after unsuccessful negotiations on the price of Sustiva (efavirenz; Merck & Co.), Brazil decided to
issue a compulsory license on this drug and to import a generic version of the drug from India (although it later decided to
source the drug from a domestic company). In a further blow to Merck & Co., Brazil began producing generic efavirenz in
2009, which resulted in a price reduction of efavirenz of 93%. Before the generic product was available, Sustiva
represented around 12% of the costs of antiretroviral expenditures in Brazil. These costs dropped to 3.9% with the
introduction of the generic (Junior, 2010).
Indian law does not contain statutory data protection
Law in India does not contain any statutory data protection for pharmaceuticals, with the existing legal provisions regarded
as inadequate. Consequently, India has been subject to significant pressure from countries such as the US and the EU
regarding data exclusivity, especially since it is signed up to the TRIPS agreement. The countries argue that after the
changes to patent law that took place in 2005, India has an obligation to incorporate data exclusivity in its domestic
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legislation. However, in a positive turn of fate for pharma, India’s government has recently started to consider including a
range of "TRIPS-plus" provisions in the country’s intellectual property rights regime, as part of the proposed EU-India free
trade agreement. This would allow the EU patent holders more favorable intellectual property rights provisions on areas
including supplementary protection certificates, data exclusivity, patent linkage, and dilution of standards of patentability.
However, the proposals, which the EU plans to finalize in 2011, have been met with criticism by key ministries in India,
including India’s commerce and health and family welfare ministries, and the department of industrial policy and promotion.
The ministries are concerned about the impact that implementing data exclusivity in India would have on the entry of
generic drugs, and state that it would delay competition and hence put back the price reduction on drugs as well as prevent
compulsory licenses from being able to be issued (Ghangurde, 2011).
Despite improvements to the patent legislation in 2005 which saw the introduction of product as well as process patents by
the Indian Patent Office, safeguards were built in to prevent “evergreening” (the practice of extending the patent life of a
product beyond 20 years by granting secondary patents on existing products for new usages and small improvements).
This means that reformulated, follow-on brands may not necessarily receive patent protection in India: a move that is
detrimental to branded players, but provides a significant opportunity for domestic generics manufacturers. For example,
the patent application for the antiretroviral combination drug Kaletra/Aluvia (lopinavir plus ritonavir; Abbott) was rejected in
January 2011 (Ghangurde, 2011). However, it is not only reformulated drugs that are impacted, since the patent application
for Glivec (imatinib; Novartis) was rejected due to evergreening (Datamonitor, Emerging Markets Series: Benchmarking
Key Countries, December 2007, DMHC2352).
In terms of compulsory licensing, the Department of Industrial Policy and Promotion is considering developing new
guidelines, following multinational takeovers of Indian pharma companies, which could result in the domestic pharma
industry being dominated by only a handful of companies, leading to a potential increase in drug prices. Driven by the need
to ensure drug availability in India, the government is seeking input on several issues, including the use of compulsory
licensing beyond emergencies, whether licenses should be issued in view of anti-competition law, and the basis for
compensatory royalty payments (Taylor, 2010). Clarifying compulsory license arrangements will undoubtedly be useful for
branded pharma companies, although the use of compulsory licenses in India could threaten companies in the long term,
particularly if licenses are used more liberally. However, greater use of compulsory licensing is unlikely to have a sizable
impact given India's track record with patent rejections. The guidelines would also mention possible profit controls for drugs.
These would certainly be more painful and would threaten branded pharmaceutical companies' expansion strategies into
emerging markets. It is also possible that the increased threat of using compulsory licensing may be used to leverage lower
prices for drugs for certain indications (e.g. cancer, HIV/AIDS) from the industry.
China is not yet affording adequate data protection for new chemical entities
China in recent years has taken steps to improve its legal framework and made amendments to its IP laws and regulations
to comply with the TRIPs initiative. However, despite a stronger statutory protection, China continues to be a haven for
counterfeiters and drug pirates (Strait Times, 2010).
Patent terms in China begin at the date of filing and not the date of issue, and it takes around 3 years for a patent
application to be processed, although there are no extensions to compensate for the time spent in regulatory review
resulting in a shorter period of protection (Chemistry and Industry, 2007). Furthermore, one of the State Intellectual
Property Office’s (SIPO’s) requirements causing particular concern to US and European businesses is that if foreign
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companies performing R&D in China plan on submitting a first-to-file patent abroad, data on the product inventions will be
required to be sent to the SIPO. This has created concern regarding the potential leakage of sensitive IP information during
the examination process (Haydock, 2009).
Article 35 of the “Implementing Regulations of the Drug Administration” law of August 4, 2002, provides 6 years of data
exclusivity from the date of marketing approval (de Ridder and Robinson, 2010). However, there are indications that the
data exclusivity protection is not provided as it is set out in law. PhRMA has asserted that the State Food and Drug
Administration (SFDA) allows non-originator applicants to submit published materials and reference regulatory decisions
made by foreign regulatory agencies as justification for approval which both infringes data exclusivity and leads to approval
of drugs without full dossiers (PhRMA, 2009). This results from the fact that for class 3 drugs (drugs new to China but
marketed elsewhere), published studies rather than full clinical dossiers are sufficient for approval, effectively allowing
companies to circumvent the data exclusivity provision (VOI, 2009).
Furthermore, in January 2010, China adopted a new regulation surrounding compulsory licensing, allowing domestic
pharmaceutical companies to make generic versions of innovator drugs (for domestic use and export) without the
permission of the patent holder for public health purposes (China Daily, 2010). More worryingly for the pharma sector, new
provisions allow any entity (given certain conditions) to petition the SIPO to grant a compulsory license 3 years after a
patent has been granted (IHS Global Insight, 2010a). Nevertheless, Datamonitor believes this regulation will have limited
impact on multinational companies for the time being, given the fact that compulsory licenses have never been issued in
China, perhaps due to lax intellectual property rights.
Meanwhile, on a positive note, several drugs manufacturers in the US signed a public/private sector agreement with China
known as the Healthcare Partnership Program in 2011, which aims to bring about long-term co-operation between China
and the US, and foster interactions between regulators in these countries in terms of research, regulation, training, and
increasing accessibility to healthcare services in China. The program will involve 12 US companies and is expected to
provide opportunities to promote US exports as well as highlight the importance of the public-private collaborations to
improve healthcare (Taylor, 2011a). However, the US has been clear on its message to China that IP needs to improve,
and has voiced its concerns on IP rights infringement and counterfeiting. As such, this latest deal shows that China is
committed to making improvements going forward.
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PRICING AND REIMBURSEMENT
Key global pricing and reimbursement controls In an effort to control costs, a number of pricing and reimbursement controls used are currently employed across various
markets as summarized in Figure 24.
Figure 24: Key global pricing and reimbursement controls
US Japan Australia France Germany Italy Spain UK Brazil Russia India China
Pricing tools
Profit controls
Reference pricing
Price cuts, freezes and ceilings Discounts and rebates
Pricing negotiations
Reimbursement tools
Patient co-pays
Formulary positive/negative lists
Volume limitations
Pharmaco-economics
Risk-sharing
Over-the-counter (OTC) switching
Pharmacist substitution
Budget caps
Generic-name prescribing
Source: Datamonitor D A T A M O N I T O R
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Pricing controls
In an effort to control costs, a number of pricing controls used are currently employed across various markets:
• Profit controls – These limit the amount of profit a company can make per product or within a specified period of
time. If the limit is exceeded, the firm may have to either compensate the government or accept a price cut.
• Reference pricing – Internal reference pricing is the average drug price in a therapeutic class, while external
reference pricing is the average price of a drug across several countries.
• Price cuts, freezes and ceilings – Price cuts are direct cuts in the price of drugs, whereas price freezes occur
when a drug remains at the same price for an agreed period of time. Price ceilings come into force when a drug
reaches a predetermined sales estimate at which point the price is then reduced.
• Discounts and rebates – Where pharma companies offer discounts and rebates to payers.
• Pricing negotiations – Drug price negotiations between manufacturers and regulatory authorities or insurers.
Reimbursement controls
Payers have also initiated a number of reimbursement controls to manage pharmaceutical spending. These include the
following:
• Patient co-pays – Patients pay for a proportion of their prescription.
• Formulary positive/negative lists – Positive lists include drugs that receive some level of reimbursement,
negative listed drugs receive no reimbursement.
• Volume limitations – Limits the overall volume of drugs prescribed, through the setting of pre-established volume
limitations based on a set price-volume agreement.
• Pharmacoeconomics – Cost-effectiveness analysis of a drug and how it fits within a given payer’s budget.
• Risk-sharing – A form of conditional therapeutic coverage that entails a contractual agreement between a payer
and a healthcare supplier or manufacturer, based on a "guaranteed" outcome resulting from the treatment. If the
outcome is achieved the payer will pay, if not, the pharmaceutical company refunds the payer for the cost of the
drug.
• OTC switching – Switching a branded prescription drug to one of over-the-counter (OTC) status.
• Pharmacist/automatic substitution – Pharmacists must substitute a prescription for a branded drug for an
identical cheaper generic where possible without consent of the prescribing physician.
• Budget caps – Setting limited budgets for drug expenditure which if exceeded may trigger a payback from the
manufacturers.
• Generic-name prescribing – When physicians are encouraged to prescribe generic drugs rather than branded
drugs.
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Pricing and reimbursement cuts were key elements included in austerity measures in many developed markets
As healthcare expenditure continues to grow, governments in many countries across the EU, as well as in Australia and
Japan, are increasingly turning to drug price cuts and reimbursement restrictions to reduce their expenditure as part of
austerity measures.
However, in the US, while drug price cuts are not the issue, rebates are – under the healthcare reform, measures enacted
in 2010 included the 50% discount required for brand-name drugs in the Medicare Part D coverage gap. The increased
Medicaid discount has also impacted US pharma since 2010.
Figure 25: A range of pricing and reimbursement pressures are negatively impacting pharma
IQWIG = Institute for Quality and Efficiency in Healthcare (Institut für Qualität und Wirkschaftlichkeit Im Gesundheitswesen)
Price cuts • 2010 saw price cuts in
Japan, Australia, France, Italy, Germany and China
• Both branded and generic drugs affected
• Reduce profits for Pharma
Growing price negotiation• Could make it harder for companies to
obtain reimbursement
• Increases cost-cutting pressures
• Germany introduced new price negotiation requirements in January 2011
• Value-based pricing system to be implemented from 2014 in the UK may involve an element of pricing negotiation
Growing price negotiation• Could make it harder for companies to
obtain reimbursement
• Increases cost-cutting pressures
• Germany introduced new price negotiation requirements in January 2011
• Value-based pricing system to be implemented from 2014 in the UK may involve an element of pricing negotiation
Greater use of pharmacoeconomics
• Support for comparative effectiveness research in the US, strengthened through healthcare reform
• IQWIG in Germany has started to use cost-effectiveness analysis in its evaluations
• France has pledged to speed up its cost-benefit evaluations of new drugs
Greater use of pharmacoeconomics
• Support for comparative effectiveness research in the US, strengthened through healthcare reform
• IQWIG in Germany has started to use cost-effectiveness analysis in its evaluations
• France has pledged to speed up its cost-benefit evaluations of new drugs
US healthcare reform• Rise in minimum Medicaid
branded drug rebate from 15.1% to 23.1%
• 50% discount on Medicare drugs for seniors in the Part D coverage gap
Reimbursement cuts• French government assigned
110 drugs to a new lower reimbursement level in 2010
• Reimbursement of prescription drugs based on the cheapest versions in Italy
Pricing and reimbursement pressures
Source: Datamonitor D A T A M O N I T O R
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By August 2010, pharmaceutical companies were already starting to feel some negative effects of the austerity measures
that had been adopted. Pharma companies which rely on Europe for a larger portion of their incomes – such as Bayer,
Merck KGaA, UCB, and Almirall – are seen as most at risk from recent price cuts, and the industry’s biggest companies are
also likely to experience lower revenues.
The head of the pharma unit at Novartis, David Epstein, stated that he expects Novartis to suffer from the combined effects
of the cuts in Spain and Greece in its 2010 second-half revenues, while GlaxoSmithKline expects its European sales to fall
by at least 3% for the next year or two (McConaghie, 2010). Elsewhere, Bristol-Myers Squibb’s CEO James Cornelius
estimated a 6% sales dip in 2011 due to pricing pressures (Euro Pharma Today, 2011).
The price cuts implemented in 2010 are summarized in Table 3.
Table 3: Examples of price cuts and rebate measures in major developed markets, 2010–11
Country Price cuts
US 50% discount on branded drugs for seniors in the Medicare Part D coverage gap
Japan Average 5.57% biennial reimbursement price cut in April 2010. Long-listed products with generic competition subject to further 2.2% average reduction
Australia 23% average price cuts on Formulary 2 drugs from December 2010
France Price cuts through the 10–20% reimbursement band in September 2010 to exceed 10% for angiotensin II receptor antagonists, erythropoietins, anti-TNF alpha antibodies and high-dose statins
Spain Austerity package announced in May 2010 to cut patented drug prices by 7.5% by August 2010 (4% for orphan drugs). Generic and off-patent drug prices were cut by up to 30% in May 2010
Italy Prices of off-patent and generic drugs to be cut by 12.5% from 2011
Germany Rebate on non-reference priced drugs raised to 16% (retrospective from August 2009 until December 2013)
TNF = tumor necrosis factor
Source: Bruce, 2010b; Jacobs, 2010; Taylor, 2010a; Paris and Docteur, 2008; Pharmaceutical
Benefits Pricing Authority, 2009; Haydock, 2010a D A T A M O N I T O R
Patent-protected drugs are spared by Italian price cuts but off-patent and generic drugs suffer
In Italy the government has introduced several price cuts on fully reimbursable drugs (both branded and generic) since
2002. Price cuts have also been implemented through sales limitations, which impose a proportional price discount on
drugs with a higher than average expenditure level. In 2005, a 10% discount was applied to 56 selected substances,
because sales of these drugs grew faster than the market (VOI, 2009).
More recently, in May 2010, Italy’s government passed a series of measures seeking to achieve an estimated €1.2bn
($1.6bn) reduction in pharmaceutical expenditure during 2010–12, as part of its €24bn ($32bn) austerity package.
Measures include: price tenders organized by the Italian Medicines Agency (Agenzia Italiana del Farmaco; AIFA) for the
supply of a number of generics and off-patent brands to be reimbursed by the Servizio Sanitario Nazionale (SSN, Italy's
national health service); reimbursement of prescription drugs based on the cheapest versions; and a proposed price cut of
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12.5% from 2011 which will affect generic and off-patent drugs (Bruce, 2010b). The pharma industry is particularly
concerned that reimbursement will be based on the cheapest version of a given drug, fearing that it will favor generics
players. As a result, this move may drive some branded companies out of business as well as restrict the choice of drugs
available through the SSN.
In addition, plans were made in July 2010 to slash the prices of drugs that have emerged from a “pay for performance”
(risk-sharing) program in 2011 on the basis that the medicines – cancer treatments and expensive biologics – had not
demonstrated the effectiveness that pharma had claimed they would. The Italian government launched the program in
order to obtain post-marketing efficacy information to assess cost-effectiveness and efficacy. Under the scheme, drugs are
priced according to 2-year studies in a Phase IV setting and if the results of these studies are that the drugs are less
efficacious than claimed the government will cut prices. Initially, drugs firms will see reductions of 20–30% off listed prices
and medicines could then be further reduced by 30–40% depending on the outcome of the efficacy studies which are yet to
be undertaken (Adams, 2010b).
For more information on price cuts in Italy, please refer to Datamonitor's report Italy Pharmaceutical Market Overview (June
2010, DMHC261).
Austerity measures in France impact both prices and reimbursement rates
France is under pressure to confront its mounting budget deficits and consequently, in June 2010, the government
announced plans to reduce the healthcare expenditure bill for 2010 by an extra €600m ($796m).
One of the ways in which it plans to do this is by reimbursement cuts through the newly introduced 10–20% reimbursement
band. The new reimbursement band was introduced in April 2010, with the government assigning 110 drugs that were
reimbursed at the 35% level and regarded of low therapeutic value to a new level of 10−20% reimbursement (Taylor,
2010a). The cut was expected to lead to savings of around €150m ($199m) (HIS, 2010a). Furthermore, as part of the
austerity measures announced in 2010, from January 2011, the government plans to reduce the reimbursement rates of a
number of drugs – specifically, those for medicines with a moderate medical benefit – from 35% to 30%, which is expected
to affect nearly 1,000 drugs (Sukkar, 2010c).
The French government also adopted proposals to implement drug price cuts as part of the 2011 social security funding
bill. The draft social security financing law (Projet de Loi de Financement de la Sécurité Sociale, or PLFSS) was announced
on September 28, 2010, and was passed in November 2010 (IHS, 2010d). The government’s measures include price cuts
of innovative and generic products, a greater encouragement of generics drug use and a change in reimbursement rates. It
is expected that €500m ($664m) in savings will be generated from price cuts imposed on generic players, innovators, and
wholesalers, although at the moment it is not clear how the savings will be split between the three groups.
The price cuts will be negotiated on an individual basis between manufacturers and The Economic Committee on
Healthcare Products (CEPS; Comité Economique Des produits de Santé ) (Sukkar, 2010a), and therefore it is expected
that the larger generics companies with the greatest bargaining power (and also the ability to lower prices due to
economies of scale) will be the main benefactors. Nevertheless, the price cuts will harm all generics producers in France,
due to the already low prices of generics (at least 50% below the brand price on generic entry). The government also plans
to further encourage physicians to prescribe generics by providing financial incentives which, while benefitting generics
manufacturers, would hurt branded pharmaceuticals (Sukkar, 2010c).
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Spain’s price cuts impact both branded and generic medicines
In May 2010, the Spanish government unveiled an austerity package designed to provide healthcare savings of around
€1.3bn ($1.7bn). One of the main measures was to cut the country’s drug expenditure by discounting the prices of drugs
not included in the reference pricing system (i.e. patented medicines) by 7.5% from August 2010 (4% for orphan drugs).
The move is expected to create savings of €1bn ($1.3bn) (Bruce, 2010c, Taylor, 2010). The entire supply chain is expected
to be affected by the discounts: pharmaceutical firms will discount manufacturers' selling prices by 7.5%; wholesalers will
then apply the same discount; and pharmacies will also apply a 7.5% discount to the retail price (Bruce, 2010d). An
additional €300m ($398m) is expected to be reined in through changes to the production and dispensing of single-dose
treatments, for example by making it possible for patients to buy the exact dose that they need (Taylor, 2010). Previous
cuts introduced in May 2010 included the reduction in generic and off-patent drugs prices by up to 30% (Taylor, 2010g,
Bruce, 2010a). The Spanish Ministry of Health stated that these discounts would be proportional to the amount of time a
product had been on the market, with larger cuts imposed on drugs that have been on the market for longer (Bruce,
2010a).
These austerity measures led to an outcry by the pharmaceutical industry, which argued that they would spell serious
trouble, threatening jobs, forcing manufacturing facilities to close, and stifling innovation, with turnover predicted to fall by
20%. Pharmaceutical companies stated that they wanted co-payments for drugs – already very low in Spain – to be
increased instead (Taylor, 2010a). However, by July 2010, the Ministry of Health was already seeing a positive result from
the branded price cuts, with a 6.2% drop in the amount the government paid for each prescription compared with June
2009, with the average prescription cost at €12.70 ($16.85), down from €13.50 ($17.91). The SNS’s pharmaceutical
expenditure was also down by 2.8% to €1.0bn ($1.4bn) compared with June 2009, despite the fact that the number of
prescriptions increased by 3.8% (Bruce 2010e).
A cost-cutting measure contained in the health ministry’s most recent January 2010 pricing order created around 20 new
reference pricing groups (affecting 20 active ingredients) in order save around €500m ($664m) a year. Over 200
presentations of the following active ingredients were affected: atorvastatin, fluvastatin, levocetirizine, irbesartan,
galantamine, pramipexole, prednisone, and tizanidine. The prices of 160 existing reference groups were also updated in
the order, which affected more than 6,000 presentations (Bruce, 2010e). Another 78 products that were not subject to
reference pricing did, however, experience price reductions by 20% if they were funded by the state, had been on the
market for over 10 years, and a less expensive generic competitor had been authorized in another EU country.
Manufacturers were told to apply price reductions by March 1, 2010 (Bruce, 2010e).
For more information on price cuts in Spain, please refer to Datamonitor's report Spain Pharmaceutical Market Overview
(December 2010, HC00002-003).
Germany’s new law focuses on containing the growth of spending on patent-protected drugs
Public drug spending increased by 5.3% in 2009 (versus 2008) to €32bn ($42bn), of which the main contributor was the
growth in usage of patented drugs, growing by 8.9% (2008–09) compared to a 2% decline in value for drugs under
discounted contracts (generics and off-patent drugs included in the reference pricing system) (IHS, 2010c). In order to
contain costs, the German government passed a new law, Entwurf des Gesetzes zur Neuordnung des Arzneimittelmarktes
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(AMNOG), in June 2010 introducing higher rebates and price freezes, and expected to result in a €1.2bn ($1.6n) saving in
2011 as part of a €2.4bn ($3.2bn) package (IHS, 2010d). The law came into force on January 1, 2011 (IHS, 2010f).
Table 4: Annual savings to be made from Germany’s new law Entwurf des Gesetzes zur Neuordnung des
Arzneimittelmarktes
Measures Insurance market Annual savings ($bn)
Forced rebated contract of 16%, 30-year price freeze GKV (Statutory) 1.59
Forced rebate contracts of 16% on ambulatory treatments GKV 0.27
Forced rebate contracts of 16% for private health insurance and funding support PKV (Private) 0.27
Increases in pharmacy discount to €2.05 ($2.72) per package of prescription drugs in 2011–12 GKV 0.27
Additional wholesaler discounts of 0.85% in 2011 GKV and PKV 0.27
Forced rebates on vaccines, prices based on international reference pricing GKV and PKV 0.40
Competitive price of cytostatic drugs GKV 0.13
Total savings 3.18*
GKV = Gesetzliche Krankenversicherung; PKV = Verband der Privaten Krankenversicherung; * = numbers do not sum due to rounding
Source: IHS, 2010d D A T A M O N I T O R
The new law has increased rebates on patent-protected drugs from 6% to 16% (retrospective from August 2010 through
December 2013) on every medicine sold to health insurance funds which is not included in the reference pricing system.
The law also introduced a 3-year price freeze from August 2010 through December 2013 on all pharmaceutical prices
(based on August 2009 prices) (IHS, 2010c). The main aim of the price freeze is to stop pharma companies from increasing
prices of drugs in order to offset the new 16% rebate (Kermani, 2010). Although this is a negative development for pharma
companies operating in Germany, discounting rather than price cutting means that the list price will remain the same, and
that drug prices in other countries will not be directly impacted by the move. .
In addition, a forced rebate contract of 16% for non-reference priced drugs used in ambulatory treatments (a measure
added in the second part of the AMNOG law) is expected to generate an additional €0.2bn ($0.3bn) in savings for
wholesalers and pharmacies. Wholesalers will experience a 3.15% mark-up as of 2012 and a 30% increase in mandatory
pharmacy discounts to €2.05 ($2.72) per package of prescription drugs (in 2011–12). The Federal Union of German
Associations of Pharmacists believes that mandatory discounts for pharmacists amounted to €1.1bn ($1.5bn) in 2009, with
pharmacies only saving €850m ($1.1bn) owing to forced rebates on generics. Pharmacy budgets will be stretched further
going forward as mandatory pharmacy discounts will increase, contrary to discounts obtained from wholesalers, which are
expected to be limited (IHS, 2010d).
Although rebates and price freezes have helped control costs they do not discriminate between more and less cost-
effective or clinically effective drugs, something that may change in the future with greater use of pharmacoeconomic
evaluations and price negotiations (discussed in later sections of this report).
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For more information on Germany’s new law, please refer to Datamonitor's report Germany Pharmaceutical Market
Overview (December 2010, HC00002-001).
Australia’s changing reimbursement landscape puts pressure on local generics sector
The Pharmaceutical Benefits Scheme (PBS) is Australia’s drug reimbursement system, funded by the federal government
(through Medicare Australia) and patient co-payments. As a result of latest PBS reform measures passed in November
2010, as part of the Memorandum of Understanding (MoU), the Australian government expects to make cost savings of
A$1.9bn ($1.7bn) from 2010–11 to 2014–15 through a range of statutory price reductions and the expansion and
acceleration of the existing price disclosure program (Commonwealth of Australia, 2010).
Proposed statutory price reductions as part of the PBS reforms, effective as of February 1, 2011, include (Sukkar, 2010b):
• an increase of the 12.5% price reduction upon equivalent brand listings (generic entry) to 16%
• an additional 2% price reduction to all drugs that were in Formulary 2A (F2A) (reference date October 11, 2010)
• an additional 5% price reduction to all drugs that were in Formulary 2T (F2T) (reference date October 11, 2010)
Furthermore, on December 1, 2010, the F2A and F2T drug formularies merged into the F2 and price disclosure became
mandatory for all F2 drugs. The Expanded and Accelerated Price Disclosure policy increased the existing price disclosure
program from 162 to over 1,600 drugs. Additionally, the weighted average disclosure-related price reduction will be a
minimum of 23% during the price disclosure cycle of December 1, 2010, to April 1, 2012 (the Australian Department of
Health and Ageing, 2007; the Australian Department of Health and Ageing, 2010).
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Figure 26 illustrates the changing structure of the PBS formularies since its establishment until 2011.
Figure 26: Organization of the Pharmaceutical Benefits Scheme formularies in Australia, 1948–2011
1948
2007
2011
PBS formularyAll PBS-listed prescription pharmaceuticals
F1 formularySingle-brand
pharmaceuticals
F2 formularyPharmaceuticals for which there is at least one additional products that is considered clinically interchangeable at
the patient level (including generics)
F2A formulary
Low pharmacy trading terms (<25%) and low
discount
F2T formulary
High pharmacy trading terms (>25%) and heavily discounted
Section 100Pharmaceuticals requiring special
supply arrangements
Section 100Pharmaceuticals requiring special
supply arrangements
F1 formularySingle-brand
pharmaceuticals
F2 formularyPharmaceuticals for which there is at least one additional
products that is considered clinically interchangeable at the patient level (including generics)
Section 100Pharmaceuticals supplying special
supply arrangements
1948
2007
2011
PBS formularyAll PBS-listed prescription pharmaceuticals
F1 formularySingle-brand
pharmaceuticals
F2 formularyPharmaceuticals for which there is at least one additional products that is considered clinically interchangeable at
the patient level (including generics)
F2A formulary
Low pharmacy trading terms (<25%) and low
discount
F2T formulary
High pharmacy trading terms (>25%) and heavily discounted
Section 100Pharmaceuticals requiring special
supply arrangements
Section 100Pharmaceuticals requiring special
supply arrangements
F1 formularySingle-brand
pharmaceuticals
F2 formularyPharmaceuticals for which there is at least one additional
products that is considered clinically interchangeable at the patient level (including generics)
Section 100Pharmaceuticals supplying special
supply arrangements
Source: Datamonitor D A T A M O N I T O R
Furthermore, in May 2010 the government decided not to form any new therapeutic groups during the 4-year period of the
MoU unless it believes that a sponsor is seeking to list a minor variation of one of its already-listed drugs, and where the
Pharmaceutical Benefits Advisory Committee (PBAC), using the evidence available to it, forms a view that the new drug
offers no meaningful clinical advantage over the existing drug and is interchangeable on an individual patient basis
(Commonwealth of Australia and MA, 2010). The government also promised to provide sponsors with reasonable notice of
its intention to form any new group and seek sponsor comment prior to the determination of such a group.
In passing the bill into legislation, certain amendments were imposed, including (Pharma in Focus, 2010):
• government report on examination of any barriers to generic market entry caused by inappropriate use of
intellectual property rights due by June 30, 2011
• biannual government discussions with the Pharmacy Guild of Australia, the National Pharmaceutical Services
Association, the Generic Medicines industry Association and MA on the impacts of reforms and any consequent
issues
• biannual reports to parliament on the affordability of, and access to, prescription medicines
• monitoring of the dispensing of medicines under the co-payment threshold (from April 2012)
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• investigation by the Pharmaceutical Benefits Advisory Committee (PBAC) into whether rosuvastatin
(Crestor/Visacor; AstraZeneca) and simvastatin (genericized) should be included in the statins therapeutic group
The impact which these intended reforms will have on various stakeholder groups is discussed in Figure 27.
Figure 27: Impacts of PBS reforms on stakeholder groups in Australia, 2011
Positive impacts of PBS reform Negative impacts of PBS reform
Wholesalers
Pharmacists
Patients
Innovators
• Ensured period of policy stability allows forward planning
• F1 formulary unaffected by statutory price cuts
• Price cuts to products coming off patent
Generics
• Ensured period of policy stability allows forward planning
• Price cuts to all products in F2 formulary
• Price disclosure means some product prices may drop below profitable levels
• Price disclosure increases administrative burden
• Price disclosure will devalue existing inventory each adjustment cycle
• Community Service Obligation funding pool no longer covers costs
• Greater use of manufacturer direct-to-pharmacy distribution
• No significant positive impact • Reduction of revenue margins
• Prices of many medicines will be lower • Minimal risk of supply interruptions
Prescribers • No significant positive impact • No significant negative impact
• No significant positive impact
Government • Expected savings of A$1.9bn ($1.7bn) • Potential increase to administration costs in short-term
PBS = Pharmaceutical Benefits Scheme
Positive impacts of PBS reform Negative impacts of PBS reform
Wholesalers
Pharmacists
Patients
Innovators
• Ensured period of policy stability allows forward planning
• F1 formulary unaffected by statutory price cuts
• Price cuts to products coming off patent
Generics
• Ensured period of policy stability allows forward planning
• Price cuts to all products in F2 formulary
• Price disclosure means some product prices may drop below profitable levels
• Price disclosure increases administrative burden
• Price disclosure will devalue existing inventory each adjustment cycle
• Community Service Obligation funding pool no longer covers costs
• Greater use of manufacturer direct-to-pharmacy distribution
• No significant positive impact • Reduction of revenue margins
• Prices of many medicines will be lower • Minimal risk of supply interruptions
Prescribers • No significant positive impact • No significant negative impact
• No significant positive impact
Government • Expected savings of A$1.9bn ($1.7bn) • Potential increase to administration costs in short-term
PBS = Pharmaceutical Benefits Scheme
Source: Datamonitor, Reforms to the Pharmaceutical Benefits Scheme in Australia,
February 2011, HC00060-002 D A T A M O N I T O R
For more information on Australia’s drug reimbursement system, please refer to Datamonitor's report Australia
Pharmaceutical Market Overview (August 2010, DMHC2646).
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Japan continues to focus on drug price cutting as its main cost-containment measure
Like other markets, Japan has also implemented a number of cost-saving measures. Every 2 years, Japan cuts the prices
of drugs on its reimbursement in an attempt to reduce the national drug expenditure, with the latest biennial price reduction
in April 2010 cutting average drug prices by 5.75%. The cuts are expected to generate the savings necessary to fund the
1.74% increase in physicians’ fees introduced in April 2010. Although average price cuts are not very high, more expensive
drugs may experience more severe cuts. For example, in 2008, Epogin (epoetin beta; Chugai) saw its price reduced by
18%, while in 2010 the worst hit were Glivec (imatinib; Novartis), Tasigna (nilotinib; Novartis), Sprycel (dasatinib; Bristol-
Myers Squibb), and Herceptin (trastuzumab; Roche/Chugai) with price cuts of 12%, 15%, 15%, and 18%, respectively
(Haydock, 2010a).
2010 also saw the introduction of new pricing rules bringing substantial changes to the pricing system; while there was
some good news for pharma, the majority of the changes have a negative impact on pharma companies operating in Japan
(Figure 28).
Figure 28: Drug pricing reforms in Japan bring mainly bad news for pharma
Source: Scrip 100 , 2009b; Pharma Japan (2010) D A T A M O N I T O R
The good news was that drugs will not be exposed to price cuts if they have been listed for 15 years or less, have no
generic competition, and have a percentage difference between their current reimbursement and market price which is
below the average of all products in the tariff. In total, 303 products will be exempt from having their prices changed,
representing just under half of the 624 of products reviewed under the new criteria (Haydock, 2010).
However, premiums for the development of new innovative drugs will be removed if a manufacturer fails to meet the
timeframe given for regulatory filing without any prior justification. The Japanese regulatory authority introduced the
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measure to speed up the development of drugs or treatment of indications unavailable in Japan, since drugs have tended
to launch there much later than in other major markets. Consequently, this measure will benefit Japanese patients, and will
also have a positive impact on companies’ profits, as a result of earlier drug launches (IHS Global Insight, 2009a).
While price premiums will benefit companies with mostly innovative drugs in the early stages of their lifecycles, companies
with mature products will be impacted the most as a result of the price cuts. Moreover, changes to the pricing of long-listed
products, coupled with the drive to increase generics uptake, are slowly driving this rather conservative market towards the
drug expiry dynamics typical of the other major markets, limiting the commercial longevity of drugs in Japan.
For more information on price cuts in Japan please refer to Datamonitor's report Japan Pharmaceutical Market Overview
(July 2010, DMHC2622).
US pharma companies are impacted by higher rebates and discounts, but escape Medicare drug price negotiation
The US healthcare reform signed into law in March 2010 led to an immediate rise in the minimum Medicaid drug rebate that
firms have to offer on branded drugs from 15.1% to 23.1% of the average manufacturer price (AMP) for single or multiple
source innovator drugs, and from 11% to 13% for generic drugs. This measure is expected to cost the pharma industry
$38.1bn over 10 years (2010–19), but its impact will ramp up as Medicaid is expanded to include all low income individuals
from 2014 (CBO, 2010). In fact, a number of pharma companies have already disclosed sales lost in 2010 partly due to this
measure (see below). Drugs hit the hardest are those found on Medicaid Preferred Drug Lists in state Medicaid programs,
such as: antiretrovirals, atypical antipsychotics, angiotensin receptor blockers (ARBs), ARB/diuretic combinations,
angiotensin modulator/calcium channel blockers, some antidepressants, respiratory agents (e.g. bronchodilators,
glucocorticoid/bronchodilators), anti-tumor necrosis factors (TNFs), erythropoiesis-stimulating agents (ESAs), hepatitis C
agents (interferons alpha), diabetes agents, statins, platelet aggregation inhibitors, proton pump inhibitors (PPIs), and
stimulants, such as treatments for attention deficit hyperactivity disorder (ADHD). Although pharma companies could
decide to increase prices to offset the rebate, the rebate system allows above-inflation price increases to be offset by an
additional rebate.
Furthermore, in order to close the donut hole, a progressive incremental increase in Medicare drug coverage to 25% in
2019, together with a 50% discount branded drugs for seniors in the Medicare Part D coverage gap, will reduce co-
insurance to 25%, equal to the same level as during initial coverage. These measures have a dual effect on branded
pharma in the US:
• The discount reduces revenues as drug prices are halved.
• Lower financial burden on seniors (seniors saved $38m in the first 2 months of 2011 alone (Taylor, 2011b)) are
leading to a rise in sales volume in the donut hole and more individuals will reach catastrophic coverage.
Drugs classes most likely to be affected by the donut hole discount include high-cost drugs and those used to treat chronic
diseases, since those beneficiaries are most likely to reach the donut hole. Such drugs include those for the treatment of
rheumatoid arthritis, multiple sclerosis, Alzheimer’s disease, depression, diabetes, hypertension, congestive heart failure,
dyslipidemia, and some cancers.
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Initially, while the co-insurance level is still high, the net impact on pharma will be negative. However, the decrease in co-
insurance will drive sales volume as costs will be less of a deterrent from filling prescriptions, while as more patients reach
catastrophic coverage (when no discount is required) this will lead to higher sales. Moreover, it could lead to better
coverage and greater access to branded drugs for those seniors enrolled in Medicare in 2011, although this is expected to
contribute to the $18bn in costs associated with closure of the donut hole (Taylor, 2011b).
Avalere Health estimates that a third of Part D drug plans are offering gap coverage in 2011, a 20% increase over 2010,
while those plans covering branded drugs through the gap will increase by a factor of three (Lillis, 2010), ultimately having a
positive impact on pharma.
Overall, a 1–3% drop in sales was expected as a result of the reform measures in 2010, and this is forecast to double in
2011 (Jack, 2010):
• Eli Lilly expected its US revenue to be reduced by up to $400m in 2010, growing to $700m in 2011
• Pfizer expected a $300m hit in 2010, tripling to $900m in 2011, and $800m in 2012
• GlaxoSmithKline expected its revenue to be hit by $300m in 2010
In general, companies that are expected to be hit hardest are those with the highest level of exposure to the US market
(higher proportion of revenues derived from the US).
While these measures will have a net negative impact on pharma revenues, the branded industry has at least escaped a
measure that would have introduce price negotiation for drugs provided under the Medicare program.
Nevertheless, the health reform requires that an independent payment advisory board be established in order to find ways
to reduce healthcare spending. Furthermore, although the board is not allowed to reduce coverage, it is not explicitly
forbidden to introduce Medicare drug price negotiation. Consequently, this presents a threat to pharma, and the industry is
concerned that the board has been given too much power and that it could potentially introduce measures that might be
detrimental for the industry without the need for additional legislative steps.
For more information on the US healthcare reform, please refer to Datamonitor's report US Pharmaceutical Market
Overview (September 2010, DMHC2621).
Pharma shows a strong reaction to price cuts in certain markets
Pharma appears to be fighting back against the pricing restrictions at least in some countries; 11 manufacturers have filed
lawsuits against the Czech Republic’s health ministry over its setting maximum drug prices, and 20 more companies could
do the same (Taylor, 2011a).
The industry’s willingness to fight back was also seen with its reaction to the price cuts that took place in Greece in April
2010, which saw discounts ranging from 3% to 27%. The Greek industry association, the Hellenic Association of
Pharmaceutical Companies (SFEE), wrote to Prime Minister Papandreou arguing that the measures were “catastrophic”
and would lead to domestic drug shortages and fuel further parallel trade, as well as have knock-on effects in other
European countries that use Greece for reference pricing such as Turkey (The Regulatory Affairs Journal, 2010;
Bridgehead International, 2009). As a result, a number of pharma companies such as Leo Pharma and Norgine threatened
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to withdraw pharmaceutical products (The Regulatory Affairs Journal, 2010). In response to mounting pressure, the Greek
government in June decided against its initial planned 25% average price reduction for insulin products after Novo Nordisk
announced that it would not sell its newer insulin products at the new prices but would maintain their original higher prices
instead (Sukkar, 2010a).
As such, strategies pharma companies could consider adopting in markets such as Greece where significant price cuts are
implemented include the following:
• delay any proposed brand launches in countries which impose price cuts until further notice
• prepare to withdraw high value products from the market if price cuts go ahead
• consider wider use of direct-to-pharmacy supply chain strategies to reduce parallel trade
• utilize dual pricing structures to reduce impact of parallel trade out of markets which introduce price cuts
• prepare for sales of key brands to be impacted across Europe
Despite successes in these relatively small European markets, pharma may be less likely to react so strongly in the major
global pharma markets, choosing instead to maintain good relationships with the government and payers, and lobbying key
decision makers to influence decisions and future reform measures which may negatively impact the pharma industry.
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Pricing pressures are also felt in the emerging markets
Pricing pressures are also being felt in the emerging and growth markets. In order to provide greater healthcare coverage
and service, governments in emerging markets are increasingly utilizing price cuts in to contain costs. However, in order to
drive sales of off-patent brands in these markets, a number of pharma companies are voluntarily cutting their drug prices to
stimulate volume uptake.
Brazil is widening free access of drugs to patients
The prices of medicines in Brazil are regulated by the Brazilian government under a price control mechanism which was
introduced in 2000, although this is regarded by pharma as a major barrier to trade (Knowledge Ecology International,
2010). The current system bases price adjustments on the general inflation rate in the preceding 12 months plus a variable
component based on the generic market share on a therapeutic class basis. Price adjustments take place annually on
March 31 each year, and in 2010, the Medicines Market Regulation Chamber (Câmara de Regulcão do Mercado de
Medicamentos; CMED) increased the maximum prices of medicines by an average of 4.6% according to three distinct
bands of 4.45%, 4.64%, and 4.83%, which were based on the level of generic penetration for separate therapeutic
categories (Pharma and Healthcare Insight, 2010).
In March 2009, however, pharma had to contend with the introduction of a new 25% discount on the ex-manufacturer price
of certain new drugs sold in the public system. This applied to medicines used to treat human immunodeficiency virus
(HIV), cancer and long-term chronic diseases, and products derived from blood (Anvisa, 2010). While these measures have
had a significant negative impact on companies marketing such drugs, in the long run the move may well translate into
higher volume and therefore sales within the public health system that may offset the price cut. In addition, as of February
14, 2011, several treatments for hypertension and diabetes have been made available to patients for free through a
governmental scheme ("Aqui Tem Farmácia Popular") that sees the government paying 90% of the medicines and the
patient paying just 10%. The health ministry wants to see companies cover the 10% patient co-payment in the form of a
discount, while the government continues to pay the remaining cost. Generic and largely off-patent medicines are also
affected. Some companies have deemed the discounts on already low-priced medicines too harsh. Again, however, the
widened access to medicines that these moves bring about could increase sales volumes for companies (Bruce, 2011d).
China introduces tighter pricing controls on foreign pharmaceuticals
In the past, only domestically produced drugs were subjects to price reductions in China. The Chinese pricing authority, the
National Development and Reform Commission (NDRC), enforced more than 20 rounds of price reductions for domestically
manufactured medicines between October 1997 and May 2007, generating a saving of RMB55bn ($8.1bn) for Chinese
consumers (Zhou, 2007). However, in November 2010, China announced that it would cut the retail prices of internationally
manufactured drugs. As a result, 174 medicines including antibiotics and medicines used to treat heart disease face an
average price cut of 19% from December 12, 2010 in a move that would save around RMB2bn ($300m) a year. Companies
affected include Bristol-Myers Squibb, Eli Lilly, Merck & Co., Novartis, Pfizer, and Roche. Drugs impacted the most by this
move include the hypertension and congestive heart failure drug Capoten (captopril; Bristol-Myers Squibb) with a 35% price
cut and Rocephin (ceftriaxone; Roche) with a 30% cut (Taylor, 2010e).
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In June 2010, the NDRC issued an open letter to all stakeholders in China’s healthcare industry, including all governmental
institutions and private healthcare players, inviting them to an open consultation regarding its upcoming New Methods and
Regulations on Drug Prices (Methods) (NDRC, 2010). The Methods is an extension to the Opinions of the Chinese
Communist Party Central Committee (CCPCC) and the State Council on Deepening the Health Care System Reform
(NDRC, 2009). According to the Methods, there will be three different ways of drug pricing: government pricing,
government guided pricing, and market-adjusted pricing (Figure 29). However, the consultation letter on New Methods and
Regulations on Drug Prices, while benefiting multinational branded pharma companies, was met with criticism from local
pharmaceutical companies, especially traditional Chinese medicines manufacturers.
Figure 29: Three ways of drug pricing in China
Source: NDRC, 2010; Datamonitor D A T A M O N I T O R
Furthermore, in May 2010 it was reported that an official from NDRC indicated that the country may move to improve its
current pricing model through introduction of pharmacoeconomic assessment and introduction of international reference
pricing (with countries such as South Korea and India used as references). However, such policies would undoubtedly be a
negative development for the branded sector in the country. Also, the introduction of a reference pricing system may raise
the need for strategic evaluation of the market in the Asian region as a whole (IHS Global Insight, 2010b).
Russia has increased its drug price controls
Responding to spiraling drug prices, in August 2009 the Russian government issued a draft decree, “On Enhancement of
State Regulation of Prices of Essential Medicines”, to regulate prices of drugs on the Essential Drugs List (EDL) and to set
mark-up limits (GalbraithWight, 2010). The new provisions came into effect in January 2010 when the government declared
that all drugs included on the EDL must have their maximum prices and trade mark-ups registered. Manufacturers are also
required to annually registrater the maximum factory price calculated according to the Ministry of Health’s methodology, or
otherwise pay a penalty for not complying. Under the new registration process, Roszdravnadzor (Russia’s medicines
licensing body) registers ex-manufacturer prices for domestically manufactured medicines and prices are declared to
customs for imported drugs. Roszdravnadzor also has the authority to overrule prices which it believes are too high.
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Importantly, wholesale and retail mark-ups recorded by local authorities must together not exceed 30% of the registered
price in their regions, substantially lower than previously.
However, the changes have not been met with approval by Pharmaceutical Research and Manufacturers of America
(PhRMA), which has complained that the methodologies contained in the bill differ substantially from current global
practices (Knowledge Ecology International, 2010). There is also concern that capping drug prices will make it unprofitable
to produce vital and essential medicines, which could cause drug shortages. Others point out that fixing prices on an
annual basis does not take several key issues into account, including: inflation; rising prices of active pharmaceutical
ingredients (APIs); spending on modernization to meet good manufacturing practice (GMP) criteria and business
development; and growing energy and transport bills. As a result, manufacturers may have no choice but to raise the prices
of more innovative drugs not included on the EDL, impacting patient access and ultimately drug sales (Bailey, 2010a).
India threatens to expand drug pricing controls
Attempts have been made to introduce pricing controls in India but have been unsuccessful so far. There were 354
medicines on the National List of Essential Medicines (NLEM) as of 2009, but only 45 are scheduled drugs under the Drug
Price Control Order, since the scheduled drug list was based on the National Essential Drugs List in use between 1979 and
1995. Consequently, the National Pharmaceutical Policy 2006 proposed bringing all 354 drugs in the NLEM under the price
control (National Pharmaceutical Pricing Authority, 2009). However, there is strong opposition from the pharmaceutical
industry to the inclusion of all 354 NLEM drugs for obvious reasons. Even if all the drugs in the NLEM are brought under
price control, nearly 60% of the 300 top-selling medicines responsible for 90% of retail sales in India will remain outside the
scope of the NLEM (Shergill, 2010).
Branded pharma adopts flexible pricing strategies to capture emerging markets growth
In order to drive volume uptake (and therefore sales) in the emerging and growth markets, international pharma companies
are adopting strategies such as launching off-patent drugs (often at a discount), branded generics (bearing the acquiring
company’s name/logo), and local brands owned or licensed by the acquiring pharma company. Pharma is also volunteering
to make price cuts.
For example, GlaxoSmithKline announced in 2010 that it would cut the prices of 35 brands, including Avamys (fluticasone
furoate) and Avodart (dutasteride), in Indonesia, following its decision to cut the prices of 28 drugs in the Philippines in
2009 by between 30% and 50%. This strategy paid off for GlaxoSmithKline: after dropping the price of its cervical cancer
vaccine by 60% in the Philippines, it experienced a six-fold rise in monthly drug volumes. The company also plans to
introduce a "microfinance scheme" in both Indonesia and the Philippines to further extend coverage (Cooper, 2010).
Similarly, Pfizer in early 2010 announced that it was launching its “eCard” program, a discount card in Russia, in order to
reach 500,000 Russian patients over the course of year, with plans to expand the program to Mexico, Brazil, and
Venezuela. The program aims to increase access to drugs that were previously unaffordable for many people. In addition to
the expected increase in sales volume, the company also uses the card system to collect patient information such as the
time between when a prescription is filled and when it can be refilled, with refill reminders sent if needed. However, the
program has received criticism. In the Philippines, for example, while 2.2 million patients use Pfizer’s eCard, the company
has been accused of discriminating against poorer patients since cards are mostly distributed by medical sales reps that
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visit expensive hospitals. Consequently, there is the problem of which 500,000 Russian patients will benefit from the
discount (Raymond, 2010).
However, companies will still be wary of going too far in offering tiered or preferential pricing schemes. According to David
Brennan, CEO of AstraZeneca: “The risk around tiered pricing is that the middle-income markets might then want to
reference price against Central Africa, and that is not something we are going to support” (Hirschler, 2010). Nevertheless,
with mounting pressure to increase access to medicines for chronic diseases in addition to malaria, AIDS, and tuberculosis,
it seems likely that pharma will continue to make price cuts in the emerging markets.
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Raised cost-effectiveness barriers lead to reimbursement restrictions
As previously discussed, it is increasingly difficult for pharmaceutical companies to gain market share, particularly for high
value drugs. Gaining positive guidance from the National Institute of Health and Clinical Excellence (NICE) in the UK
continues to be a major challenge for manufacturers of expensive biologic drugs, and while Germany’s Institute for Quality
and Efficiency in Healthcare (Institut für Qualität und Wirkschaftlichkeit im Gesundheitswesen; IQWiG) has also embraced
the use of cost-effectiveness (although not yet to the same extent as in the UK), it nevertheless signals a further step
towards control of healthcare costs in Germany. Furthermore, France is also taking strides towards utilizing
pharmacoeconomics, as are insurance companies and pharmacy benefit managers (PBM) in the US, while companies
operating in Japan complain that innovation is not being adequately rewarded and that there are too many hurdles to
achieve high-value innovation premiums.
The UK is a difficult market to access for expensive therapies
In the UK, NICE determines whether a drug is sufficiently cost-effective to be used by the National Health Service (NHS),
the primary prescriber of prescription-only drugs in the UK. Even though free pricing exists in the UK for now, if NICE
deems the drug is not sufficiently cost-effective, companies may have to lower their price in order to gain NICE approval.
NICE’s evaluation includes significant pharmacoeconomic (PE) analysis.
Because of the important role that pharmacoeconomics play in the UK, NICE sets the standard globally for the use of
pharmacoeconomic analysis in health technology assessments. From a drug developer’s perspective, this makes it
important to be able to justify the drug in pharmacoeconomic terms. Incorporating pharmacoeconomic-focused analysis
and research into clinical trials can be complex and time-consuming, and in many cases it can be difficult to predict whether
the analysis will result in a favorable opinion from NICE. Nevertheless, it is central to securing a successful UK launch if a
drug is selected for NICE assessment, as well as having more far-reaching effects, because NICE decisions are widely
viewed and analyzed by pricing and reimbursement bodies in other countries. Indeed, since NICE guidance is sometimes
available before a drug has gained approval elsewhere, some countries take NICE decisions into account when evaluating
new therapies.
However, NICE has recently received a substantial amount of negative press and criticism from pharma and elsewhere for
failing to judge a number of innovative anticancer drugs as sufficiently "cost-effective" to be prescribed on the NHS, and
thus the body has been charged with being too focused on cost-containment rather than cost-effectiveness, as well as
failing to be transparent in its proceedings. The result is that cancer drug uptake has been slow in the UK, as reflected by
an analysis that was presented in November 2010 at the International Society for Pharmacoeconomics and Outcomes
Research (ISPOR). The study found that while in 2007, one in three new drugs was recommended by NICE, in 2009 this
had dropped to just one in 10, with only one out of 23 cancer treatments appraised receiving a full approval in 2009
(PMLive, 2010).
To help improve access to cancer drugs, the UK government has pledged to make improvements in the delivery of
innovative cancer drugs to the patients who need them. One incentive is a new cancer drug fund in the UK scheduled to be
rolled out from April 2011. Reportedly, £200m ($309m) per year will be allocated to the fund, and it will be up to regions to
decide how to allocate the fund. It is hoped that this will bring the UK up to the average level of provision in Europe for
newer, more expensive cancer medicines. However, Datamonitor analysis indicates that with the current number of cancer
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drugs that have not been approved by NICE, this fund will only be sufficient to scratch the surface. In 2009, the UK cancer
drug market was worth $1.5bn, compared to $4.3bn in France or $2.5bn in Italy, which have similar populations
(Datamonitor, Commercial Insight: Top 20 Cancer Therapy Brands, September 2010, DMHC2661). Cancer drug
expenditure also falls below the level seen in Spain, where the population is smaller. Therefore, cancer drug access is set
to stay below that in other countries at a similar stage of economic development, despite the new funding.
Doctors will be allowed to use the fund to prescribe drugs that have not been approved by NICE, while those that have
been will continue to be funded from the NHS budget. Pharmaceutical companies may see this as an opportunity to obtain
higher prices for their drugs, but the Department of Health is urging regions to ignore drugs that companies refuse to submit
to NICE. Critics have pointed out that since the fund can be used to pay for drugs rejected by NICE, it will undermine the
institute’s role. However, the role of NICE is set to change in any case with the introduction of value-based pricing from
2014, and while it will still carry out the cost-effectiveness evaluation of new drugs, it will no longer be able to ban use of
drugs on the NHS, instead largely having an advisory role, although the exact details of this (beyond advising clinicians on
most effective treatments and quality standards) are set to be determined at a later date. Nevertheless, it is still expected to
be central to the UK’s drug access route.
Moreover, by 2013 Strategic Health Authorities and primary care trusts will be phased out and replaced by general
practitioner (GP) commissioning consortia, raising additional concerns regarding decision-making and postcode lotteries.
It is becoming increasingly difficult to obtain a high price for new drugs in France
In France, it can be difficult to achieve a good rating on the Service Medical Rendu (SMR) or Amelioration de Service
Medical Rendu (ASMR) scales, which determine the reimbursement level for a given drug. Reports have stated that the
ASMR evaluation has become restrictive and unpredictable, making it harder to ensure that France recognizes innovation.
Only a few patented pharmaceutical products fall under the most favorable ASMRs (level I–III), with most products falling
under the ASMR IV or V categories (PhRMA, 2009). There were 31 approvals for new drugs or expanded indications in
2008, but only 10 were given ASMR I status (La Tribune, 2009). Nevertheless, the possibility of obtaining high prices for
innovative drugs makes France an attractive market for the early commercialization of innovative candidates, but still
behind Germany.
France is also taking strides towards improving and focusing more on pharmacoeconomics, as seen by the Haute Authorite
de Sante’s (HAS) pledge in early 2009 to: (IHS, 2009a):
• speed up its cost-benefit evaluations of new drugs
• work more closely with its international counterparts
• conduct long post-market analyses for newly approved medicines
• allow pricing to play a greater role in the guidance it issues on new medicines, rather than just focusing on
therapeutic benefit
HAS also pledged to spend no more than 90 days on each new drug evaluation, with a maximum of 12 months for
reviewing a drug class as a whole by 2011 (IHS, 2009a). In July 2008, HAS also set up a committee, the Economic and
Public Health Specialist Committee (Commission Evaluation Economique et de Santé Publique; CEESP), which has the
remit of complementing medical opinions issued by HAS committees for drugs, medical devices, and procedures with
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community benefit assessment. The committee, consisting of 25 members across various backgrounds (economics,
ethics/philosophy, social sciences, patient representatives, general practitioners, and specialists) is in charge of multiple
technology appraisals (MTAs) and public health guidance (scoping validation methods) (Rochaix, 2010).
These initiatives should strengthen the role and position of HAS as the drug watchdog in France, although to date, it is not
clear what impact its new focus on pharmacoeconomics will have on drug manufacturers in France. However, with the
need to reduce national drug spending (in order to help contain rising healthcare costs), pharmaceutical companies can
expect it to become more difficult to secure a high reimbursement level for their products going forward, although for truly
innovative products, this should still be possible. On the upside, HAS has declared that it is committed to a more direct
communication with the pharma industry, which should increase transparency and reduce time taken for reimbursement
decisions.
Achieving premium drug pricing in Japan is difficult
Difficulty in achieving reward for innovation is not simply a problem in Europe. Companies operating in Japan have also
complained that innovation is not being adequately rewarded and that there are too many hurdles to achieving high value
innovation premiums, with few drugs having been awarded this status. This, combined with price cuts, will hurt the pharma
industry in the long term due to small return on investment from the Japanese market, which could in turn stifle R&D
initiatives.
As discussed earlier, manufacturers that develop new drugs for indications which are as yet untreated in Japan can be
eligible to price such drugs at a premium. However, premiums for the development of new innovative drugs will be removed
if a manufacturer fails to meet the timeframe given for regulatory filing without any prior justification. The Japanese
regulatory authority introduced the measure to speed up the development of drugs or treatment of indications unavailable in
Japan, since drugs have tended to launch there much later than in other major markets. Consequently, this measure will
benefit Japanese patients, and will also have a positive impact on companies’ profits, as a result of earlier drug launches
(IHS Global Insight, 2009a).
Germany is using cost-effectiveness in its drug evaluations
Germany has embraced the use of cost-effectiveness, though not yet to the same extent as in the UK. The relative
fragmentation of the system, with numerous sickness funds, has allowed pharmaceutical manufacturers to adopt a range of
strategies aimed at boosting their sales, with the most innovative involving payer contracting combined with additional
services. Also, the Institute for Quality and Efficiency in Healthcare (Institut für Qualität und Wirkschaftlichkeit im
Gesundheitswesen; IQWiG), founded in 2004, has the remit of making recommendations for clinical use based on
pharmacoeconomic assessments, and since 2007 has had the legal right to use cost-effectiveness analysis of drugs in its
evaluation.
In early 2010, IQWIG finally revealed that it will use efficiency frontier analysis to determine the cost-effectiveness of a
drug, based on Australia's Pharmaceutical Benefits Advisory Committee (PBAC) methods. Under the new system, drugs
that are deemed not to provide any benefit over existing treatments are not subject to further analysis and their
reimbursement level is set using reference pricing. On the other hand, drugs that have no real alternatives are excluded
from the assessment and are reimbursed at the proposed price. It has been reported that of the 30 benefit reports on drugs
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produced by IQWIG so far, only one in five has shown additional benefit, and could thus undergo the health economic
evaluation (Sukkar, 2010b).
Even though IQWIG’s approach is less severe for the pharmaceutical industry than NICE’s system in the UK, in that it does
not impose an absolute cost-effectiveness threshold, it nevertheless signals a further step towards control of the healthcare
costs in Germany. Drugs providing little or no improvement over existing therapies, such as me-too drugs, are likely to be
most affected and may struggle to achieve desired reimbursement levels, especially when generic versions are available.
However, this is already seen in practice with reference groups and formulary placement in Germany.
IQWiG is yet to issue any cost-effectiveness assessment on drugs. Only two such health economic evaluations have been
initiated and are yet to be completed: these have been referred to IQWiG by the Federal Joint Committee (Gemeinsamer
Bundesausschuss; G-BA) and are a comparison of clopidogrel with aspirin and a study of a group of antidepressants. The
referral was made in December 2009, with results expected in 2011 (Sukkar, 2010b).
Introduction of the new price negotiation rule will strengthen IQWiG’s role since all new drugs will need to be assessed.
However, there are concerns regarding the speed at which IQWiG will be required to carry out such assessments. At the
moment, it takes the institute around 18 months to assess a drug’s clinical effectiveness and another 18 months to assess
its cost-effectiveness. Under the new rules, the institute will have to produce at least an early assessment after 3 months,
which despite a staffing increase may be a tall order (Sukkar, 2010d).
For pharma companies, the new benefit assessment rule means that they will need to be ready with dossiers for products
under review as well as understand what data will be required for the assessments, all in rather a short timeframe. The
pharmaceutical industry also believes that the method by which new treatments are compared to old ones for which head-
to-head trials may not be available is unfeasible as the commissioning of new studies necessary to generate comparability
data would augment costs and involve considerable time. An additional criticism stems from IQWiG’s lack of comparison
across indications as this may lead to different reimbursement standards for different indications (Kifmann and Neelsen,
2010). Furthermore, pharma is also concerned that efficiency frontier analysis is just another step that will slow down the
process of innovation in Germany and make it a less attractive place for pharmaceutical R&D. AstraZeneca was reported to
have stated that it wanted the process to be better defined, and the rules of the procedure clarified, in order to create a
clear framework and foster transparency for everyone involved. Other pharmaceutical companies are still mulling over the
developments. Meanwhile, the cost of filing a dossier, at €3,750 ($4,976), though not of huge significance to Big Pharma,
will likely impact small- to medium-sized companies to a greater degree (Kermani, 2011).
Since the additional benefit evaluation process excludes orphan drugs, this may further stimulate companies to develop
novel drugs for orphan indications, which is obviously beneficial to patients. However, the G-BA is concerned that
subsequent indication expansion beyond orphan diseases could be viewed as companies manipulating the authorization
process. Consequently the G-BA has stated that it will not tolerate exploitation of the reimbursement system going forward
(Kermani, 2011).
Comparative effectiveness analysis is starting to be used even in the US
Although pharmacoeconomic studies are used to reach pricing and reimbursement decisions in the US, the fragmented
nature of the market with many different payers has resulted in patchy implementation with a lack of any unified approach,
unlike that seen in countries such as Germany and the UK. Currently there are some individual institutions that are
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conducting small-scale comparative effectiveness studies such as the National Eye Institute’s Avastin (bevacizumab;
Roche) versus Lucentis (ranibizumab; Novartis) trial (National Eye Institute, 2008). However, this is set to change following
the establishment of a comparative effectiveness research institute known as the Patient-Centered Outcomes Research
Institute, established under the health reform to conduct research into the clinical effectiveness of medical treatments.
However, any findings reached by such a center are not to be construed as mandates, guidelines, recommendations for
payment or coverage, and quality-adjusted life years are not to be used in its research. Datamonitor expects it to have an
influence on federal, state, and private payers, and therefore despite the aversion towards medicine restrictions, the US
pricing and reimbursement landscape is set to shift towards an increasing emphasis on cost-effectiveness.
In addition, some pharmacy benefit managers (PBM) are turning to their own comparative effectiveness research. In
October 2009, Medco Health Solutions launched its own head-to-head study comparing Plavix (clopidogrel; Sanofi-
Aventis/Bristol-Myers Squibb) to newly launched Effient (prasugrel; Ell Lilly). With Plavix nearing the end of its patent life,
the possibility of savings prompted the cost-conscious PBM to identify which was better value for money: treating patients
with Effient or generic clopidogrel. With Plavix showing poor efficacy in 25% of patients with a genetic mutation in the
CYP2C19 gene required to metabolize the drug, the study goes beyond the head-to-head clinical trials by focusing on the
population that responds to treatment with Plavix (Staton, 2009). The study will finish in 2012 in time for the company and
its clients to reap additional savings, should the study demonstrate that Effient does not lead to better health outcomes in
patients responding to Plavix.
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Risk-sharing is becoming a viable option for both payers and industry, particularly in Europe
As it becomes increasingly challenging for pharma to obtain reimbursement and market access through public healthcare
systems for expensive and often biologic therapies, risk-sharing agreements are rising in popularity in the developed
markets. A risk-sharing agreement can be defied as:
“Agreements concluded by payers and pharmaceutical firms to diminish the impact on the payer’s budget of
new and existing medicines brought about by either the uncertainty of the value of the medicine and/or the
need to work within finite budgets.”
Adamski et al. (2010)
Risk-sharing agreements are based on a "guaranteed" outcome resulting from the treatment, be that based on financial or
outcome/performance criteria. If the outcome is achieved the payer will pay; if not, the pharmaceutical company refunds the
payer for the cost of the drug (Adamski et al., 2010). Such arrangements distribute the risk between the payer and the
provider and represent a useful tool, particularly when there is insufficient information available on a new drug and how it
will perform in the real-world setting.
• Financial-based schemes – These include price-volume agreements and patient access schemes. Price-volume
agreements focus on controlling financial expenditure associated with prescribing the drug, with pharma companies
providing refunds when treatment continues after the set budget is exceeded. Patient access schemes provide free
or discounted drug access for an agreed period.
• Performance-based schemes – These include those where companies refund agreed costs or provide the drug
free if the desired outcome is not reached. Alternatively, a price reduction takes place if the new drug does not
deliver the required therapeutic efficacy targets.
In view of their complexity and cost, performance-based schemes have given way to simpler, financed-based schemes
which are effectively forms of flexible pricing that allow the manufacturers to give a discount without affecting the list price,
thereby avoiding any knock-on price reductions in other markets as a result of reference pricing. However, despite the
advantages of risk-sharing agreements for pharma, there are also a number of disadvantages as summarized in Figure 30.
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Figure 30: Advantages and disadvantages of risk-sharing agreements for pharma
Countries may start to increasingly negotiate this way requiring further investigations
in drug efficacy and value
Allows manufacturers to achieve reimbursement without need for
additional clinical trials, thus avoiding extra costs and delay
Allows manufacturers to achieve reimbursement without need for
additional clinical trials, thus avoiding extra costs and delay
Encourages development of bio-markers that help target patient
populations where health gain/value is greater
Access to new technologies earlier means greater revenue
potential for Pharma
Perceived as another barrier to Pharma (e.g. NICE often needs
pressure before it considers risk sharing schemes)
Perceived as another barrier to Pharma (e.g. NICE often needs
pressure before it considers risk sharing schemes)
High administrative burden and difficult to implement or judge
success
Encourages innovation and acts as a R&D incentive
Advantages of risk-sharing agreements
Disadvantages of risk-sharing agreements
Allows higher list price and overall global price to be
maintained
Allows better health outcomes to be achieved with the right
patients being treated
Lower sales achieved in a given market
Other countries may require the same discount
Difficult to define specific clinical outcomes for some
diseases
R&D = research and development; NICE = National Institute for health and Clinical Excellence
Source: Datamonitor D A T A M O N I T O R
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Table 5 lists some examples of risk-sharing agreements in the US, Italy, Germany, and the UK.
Table 5: Examples of risk-sharing agreements in operation in the UK, Italy, the US, and Germany, 2009–10
Country Year Drug Indication Company Type of risk-sharing agreement
Strategy
UK
2009 Stelera (ustekinumab)1
Severe plaque psoriasis
Janssen-Cilag (Johnson & Johnson)
Finance-based
NHS to buy doses appropriate for patients weighing 100kg or more at the same price as those for lower-weight patients (essentially two vials for the price of one)
UK
2009 Revlimid (lenalidomide)1
Multiple myeloma Celgene Finance-based
The NHS pays for treatment for the first 2 years in patients who have received at least one prior therapy. If treatment is required after the 2 years, then Celgene will cover the costs
UK
2010 Votrient (pazopanib)5
Advanced renal call carcinoma
GlaxoSmithKline Finance-based
GlaxoSmithKline will give a 12.5% discount off the list price and will pay the NHS a rebate depending on the outcome of a head-to-head trial known as COMPARZ, data of which will be available in 2012
Italy
2009 Erbitux (cetuximab)2
Advanced or metastatic colorectal cancer
Merck KGaA Performance-based
Erbitux (cetuximab) should only be used on patients who test positive to the expression of the epidermal growth factor with the wild type KRAS gene; the company is required to pay 50% of the costs of the drug in the event that doctors see no stabilization of a patient’s metastatic tumor after 2 months
Italy
2009 Sprycel (dasatinib)2
Chronic myeloid leukemia and acute lymphoblastic leukemia
Bristol-Myers Squibb
Performance-based
The Italian health service fully covers the cost of drugs for the responders following assessment; manufacturers refund the cost in the case of disease progression
Italy
2009 Tyverb (lapatinib)2
HER2+ breast cancer
GlaxoSmithKline Performance-based
The Italian health service fully covers the cost of drugs for the responders following assessment; manufacturers refund the cost in the case of disease progression
US
2009 Januvia (sitagliptin) and Janumet (sitagliptin and metformin)3
Type 2 diabetes Merck & Co. Performance-based
Cigna will receive a discount on the drug if a patient’s blood sugar falls, while Merck & Co. gets a better placement for Januvia and Janumet on Cigna’s formulary
US
2009 Avastin (bevacizumab)3
Roche/Genentech Finance-based
Genentech introduced the annual cap for the cost of drug at $55,000 for patients below a certain income level
US
2009 Actonel (risedronate sodium)3
Osteoporosis Sanofi-Aventis and Procter Gamble
Finance-based
Sanofi-Aventis and Procter Gamble agreed to reimburse insurer Health Alliance for the costs of treating fractures suffered by patients taking the medicine
Germany 2009 Aclasta (zoledronic acid)4
Osteoporosis Novartis Finance-based
Novartis will refund the cost of its drug in case the treatment fails
Source: 1 = Datamonitor, Pricing and Reimbursement: Innovative Risk-Sharing Strategies, July
2009, DMHC2537; 2 = Adamski et al., 2010; 3 = Pollack, 2009; 4 = In Vivo, 2009; 5 = Bruce, 2010h D A T A M O N I T O R
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UK is one of the leaders in risk-sharing agreements
There are a number of risk-sharing agreements in operation in the UK negotiated between pharma and the National
Institute for Health and Clinical Excellence (NICE). Risk-sharing can often be the only way that companies can access the
National Health Service (NHS) market in the face of NICE’s stringent cost-effectiveness criteria. While such schemes might
seem advantageous to pharmaceutical companies, in that drugs which exceed NICE’s quality-adjusted life year threshold
can still gain reimbursement, such agreements tend only to arise after intense pressure on NICE from both patients and
pharma, and require extensive negotiation. Furthermore, even when a drug is accepted under such an agreement, it may
not be deemed effective at the end of the scheme to warrant inclusion on the NHS.
Despite NICE’s public statement in 2010 that it would welcome risk-sharing offers from drugmakers in the wake of its
refusal of Sprycel (dasatinib; Bristol-Myers Squibb), Tasigna (nilotinib; Novartis), and Afinitor (everolimus; Novartis), risk-
sharing schemes have been criticized by various stakeholders within the NHS, mostly pharmacists, for being difficult and
burdensome to administer. Moreover, they will be phased out and will be replaced by the new value-based pricing system
in 2014 (Department of Health, 2010). This presents a significant threat to companies currently engaged in risk-sharing
agreements, while companies proposing to enter into such an agreement before 2014 must consider their commercial
attractiveness given the time and costs associated with them, and the limited time at market if and when approved.
However, come 2014, the dissolution of such agreements and implementation of value-based pricing will lead to an
effective list price decrease with the knock-on effects on other countries that use the UK as a reference market.
Italy has a number of performance-based risk-sharing schemes for oncology drugs
In Italy, there is no specific legal framework for risk-sharing agreements. Instead, agreements are negotiated on an
individual basis between the Italian Medicines Agency's (Agenzia Italiana del Farmaco; AIFA) pricing and reimbursement
committee and the drug sponsor, during the pricing and reimbursement negotiation procedure at the suggestion of the AIFA
Oncologic Working Group.
While the terms of individual risk-sharing agreements differ, they tend to follow two approaches (Gallo and Deambrosis,
2008):
• The national health service pays 50% of the cost of the drug for a limited period of treatment. Thereafter, the
treatment is fully reimbursed for responding patients and is withdrawn for non-responders. For example, in 2009 in
Italy, Tarceva (erlotinib; Roche), Sutent (sunitinib; Pfizer), and Nexavar (sorafenib; Bayer) were provided at 50%
discount from current prices for an agreed number of cycles (2 months for Tarceva and 12 weeks for Sutent and
Nexavar).
• The treatment is fully reimbursed for an initial period and the company pays back the cost for non-responders. For
example, the cost of Sprycel (dasatinib; Bristol-Myers Squibb) and Tyverb (lapatinib; GlaxoSmithKline) are fully
covered by the Italian Health Service for the responders following assessment with manufacturers refunding the
costs in the case of disease progression.
Agreements tend to cover a 2-year period, after which the price is renegotiated on the basis of the results of patient
outcomes during the risk-sharing period. Such schemes stimulate pharma companies to develop diagnostics (e.g.
biomarkers) which can be used to identify patient populations which best respond to a given therapy, thereby ensuring that
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the drug can maintain an optimum price and reimbursement level. For example, Merck KGaA’s risk-sharing agreement with
AIFA stipulates that Erbitux (cetuximab) should only be used on patients who test positive to the expression of the
epidermal growth factor with the wild type KRAS gene; the company is required to pay 50% of the costs of the drug in the
event that doctors see no stabilization of a patient’s metastatic tumor after 2 months (Galbraith, 2010b).
Alternatively, under the conditional reimbursement system in Italy, novel medicines are fully reimbursed for a limited period,
during which manufacturers are required to maintain detailed registers tracking the therapies, collect epidemiological data,
and obtain data on the effectiveness and safety of new drugs in practice (Adamski et al., 2010). The agreement involves a
price review for each drug after 2–3 years of studies depending on the findings (Adams, 2010b). Italy has agreed to fully
reimburse more than 25 drugs including Procoralan (ivabradine; Servier) for chronic angina pectoris, and Byetta (exenatide;
Amylin), Januvia (sitagliptin; Merck & Co.) and Zomelis (vildagliptin; Novartis) for type 2 diabetes patients who are resistant
to oral treatments (Adamski et al., 2010). However, results from the first set of studies are set to be published in the coming
months, and there are indications that the program has found drugs less effective than originally claimed by manufacturers.
As such, prices could be cut by 20–30%, or even up to 40% in 2011, depending on the outcome of the studies (Adams,
2010b). This could have an impact on reference pricing, with drug prices decreasing in countries that use Italy to set their
own prices.
The moves point to the likelihood that countries may increasingly negotiate with manufacturers in this way, with further
investigations into drug efficacy and value and thus revision of expensive drug prices becoming more common.
Risk-sharing schemes are also appearing in the US but in a fragmented manner
On the whole, risk-sharing agreements remain less common in the US than in Europe. Part of the reason for this is that
state regulations and marketplace pressures mean that insurers rarely fail to fund a drug that has been approved by the US
Food and Drug Administration (FDA). This reflects the poor leverage of individual health plans. Thus, skeptics remain
doubtful that risk-sharing schemes are likely to work on a larger-scale in the US, which has been historically dominated by
a fragmented private system. Consequently, until the roll-out of universal healthcare in the US, the uptake of risk-sharing
will be simply based on financial incentives to payers for the time being. However, it is conceivable that federal and state
programs may resort to such schemes in order to tackle the uncertainty surrounding a drug’s efficacy and cost-
effectiveness. Indeed, Medicare has already implemented an approach akin to that in the form of the coverage with
evidence development (CED). CED is a method of providing access to new drugs or medical treatments while generating
evidence needed to determine their efficacy and thus whether unconditional coverage should be given. It is essentially a
research trial during which all patients have to be registered and outcomes data collected in order to assess the efficacy at
a later date.
One example of a risk-sharing scheme is that between the pharmacy benefit management division of Cigna and Merck &
Co. In order to control costs and increase access to Januvia (sitagliptin) and Janumet (sitagliptin and metformin) for type 2
diabetes patients, a pay-for-performance deal was signed in April 2009. The deal guarantees efficacy as well as patient
compliance since Cigna receives a discount on the drug if a patient’s blood sugar falls, while Merck & Co. achieves a better
placement for Januvia and Janumet on Cigna’s formulary (Pollack, 2009). In October 2010, Cigna revealed that positive
results were being observed from the program; an improvement in blood sugar levels of over 5% for those continually
enrolled in the program was seen, regardless of which diabetes drug patients were taking. Patients enrolled in Cigna’s
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diabetes program were also found to be 3% more likely to have their blood sugar levels under control than those who were
not in the program (Center for Health Value Innovation, 2010).
Australia’s risk-sharing agreements lack transparency
There are currently two main types of risk-sharing arrangements used in Australia between the pharma industry and the
Pharmaceutical Benefits Pricing Authority:
• price-volume agreements with price reductions for sales exceeding a pre-agreed volume
• rebate arrangements with repayment of costs beyond an agreed annual subsidization cap or threshold.
As of June 30, 2009, there were 74 deeds of agreement in place or in development (Pharmaceutical Benefits Pricing
Authority, 2009).
The “managed entry scheme”, introduced as part of the Pharmaceutical Benefits Scheme (PBS) reforms in January 2011,
is a form of risk-sharing agreement, which allows companies to seek a conditional PBS listing for drugs that are still
awaiting cost-effectiveness data, but which serve patients with a clinical need. This scheme will cut patient access delays to
drugs that would not otherwise receive positive recommendations on first submission. However, it is likely to only apply to a
small number of pharmaceuticals seeking listing in the F1 formulary (which includes drugs that are not interchangeable on
an individual patient basis with therapeutically equivalent products).
In fact, managed entry to the PBS has already been used to some extent in Australia. One example is Tracleer (bosentan;
Actelion), which was approved for various pulmonary hypertension indications by the Therapeutic Goods Administration
(TGA) in 2002, 2006, and 2009. Tracleer was PBS-listed in 2004, with an expected cost to the PBS of A$28m ($25m) over
the first 4 years (the Australian Department of Health and Ageing, 2004). However, the PBS listing was subject to a risk-
sharing agreement whereby the drug’s future price would be proportionate to the mortality of patients treated with Tracleer
under the PBS. Actelion funded a Bosentan Patient Register to evaluate survival outcomes over 3 years, which is
maintained by an independent party in order to maintain impartiality. Continuing access to the medication is dependent on
the response over the previous 6 months. Survival data will be used by the PBS to re-evaluate the cost-effectiveness of the
drug and adjust its reimbursed price accordingly (Trueman et al.; 2010).
However, in general, information on the existence of special pricing arrangements is not easily located within the public
domain and often not mentioned at all on the PBS (Robertson et al., 2009). Even where a special pricing arrangement is
identified, there is no detail available on the nature of the arrangements in place. While the lack of transparency may be
blamed for inflated drug prices in other countries, it is beneficial for companies that enter into such deals as it effectively
prevents other payers from requesting similar discounts.
Risk-sharing agreements with individual sickness funds are used to boost market share in Germany
Pharma companies in Germany are turning towards risk-sharing agreements or other types of innovative deal structure for
their products, in order to maintain reference prices while still capturing a significant market share in the country. So far,
such deals have mostly focused on more mature drugs nearing the end of their patented life, poorly differentiated brands,
or those brands struggling to achieve the desired market share, since insurers do not yet have the powers to influence
prescribing of patented drugs. However, with the market in several therapeutic categories becoming rather saturated, and
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manufacturers finding it difficult to compete with a range of existing products, risk-sharing deals offer new avenues to boost
market share.
In addition to traditional rebating deals, some companies have entered into more unusual (if more creative) deals with
payers. In August 2008, Wyeth (now Pfizer) with Germany’s third largest payer, Taunus BKK, developed a compliance
support program for its injectable rheumatoid arthritis drug Enbrel (etanercept), in order to fend off competition from Humira
(adalimumab; Abbott). Under the terms of the agreement, Wyeth (now Pfizer) funds homecare visits to rheumatoid arthritis
and psoriasis patients by qualified nurses, a telephone support service, and the promotion of regular patient
communication. Although the company has to provide some discount on Enbrel (in addition to the service) to satisfy the
legal requirement for the basis of any rebate deal between a sick fund and drug manufacturer, the support program is the
focus and the main cost component, estimated to be around €500 ($663) per patient per year. However, this cost is offset
by the additional sales gained by improving patient compliance, since in general, one third of injectable drug prescriptions
otherwise tend to be discontinued after the first 3 months. As a result of the scheme, it was reported that Enbrel sales have
grown within Taunus BKK as opposed to stagnating sales of Humira, indicating that the scheme is a success (In Vivo,
2009).
Meanwhile, in 2009, Novartis entered into an agreement that is more akin to the risk-sharing agreements seen in the UK for
its osteoporosis drug Aclasta (zoledronic acid) with the sick funds Deutsche Angestellten Krankenkassen (DAK) and
Barmer Ersatzkasse (BEK), which together cover around 30% of Germany’s insured population. Novartis refunds the cost
of its drug in cases where the treatment fails, an agreement termed “no cure, no pay”. The scheme is designed to boost
Aclasta’s market share over Sanofi-Aventis’s competing drug Actonel (risedronate) and Prolia (denosumab; Amgen).
Preliminary results indicate that the scheme has had a moderate impact, boosting market share within funds that utilize the
scheme to 18% versus 14% in other funds (In Vivo, 2009). Novartis also offered to cap the cost of its wet age-related
macular degeneration drug Lucentis (ranibizumab) for Germany’s largest health insurer Allgemeine Ortskrankenkassen
(AOK) and some other insurers to €350m ($464m) per year in 2009, resulting in Lucentis sales growing substantially (In
Vivo, 2009).
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Price negotiation may be the way of the future
Given the recent changes in Germany and the UK – the introduction of new price negotiation arrangements in Germany
from January 2011 and the planned role out of value-based pricing in the UK from 2014 – it seems that drug price
negotiations between manufacturers and regulatory authorities or insurers may become the norm for pharma in the future.
As a result, this could make it more challenging for companies to obtain reimbursement for innovative products as well as
impact sales through pricing pressures.
Value-based pricing in the UK to be introduced in 2014
The Pharmaceutical Price Regulation Scheme (PPRS) in the UK is due to be replaced with a value-based pricing scheme
in 2014, and will apply to medicines launched after January 1, 2014, and potentially to some older medicines, subject to
discussion with the industry.
The proposed guidelines, set to be reviewed in April 2011, envisage different price thresholds for drugs based on the value
that they deliver to the health service. Under the new proposals, the value of new products would be assessed and their
benefits compared with the benefits that could be gained if the funds were used elsewhere in the UK's National Health
Service (NHS). The government would set a range of maximum prices reflecting the different values that medicines offer.
One option considered is to use the measure of quality-adjusted life years (QALY) as the main currency of cost-
effectiveness, as the National Institute for Health and Clinical Excellence (NICE) does at the moment, with the threshold
expressed as a cost per QALY gained. However, rather than using one standard cost-effectiveness threshold, as is the
case under the current system, a range of thresholds would be applied depending on individual products' characteristics
and also taking into account additional factors (Department of Health, 2010).
For instance, a basic threshold would reflect the benefits displaced elsewhere in the NHS when funds are allocated to the
new drug. This would be set in the future and may differ from the current threshold of £20,000–£30,000 ($30,906–46,359)
per QALY. Higher thresholds would be applied to medicines tackling diseases with greater burden of illness (the greater the
focus on diseases with unmet need or severe illnesses, the higher the threshold), medicines that demonstrate greater
therapeutic innovation and improvement compared to existing treatments, and medicines demonstrating wider societal
benefits. While the pharmacoeconomic evaluation would be relatively unchanged compared to NICE's existing method, the
new system will ostensibly consider other factors such as societal value (e.g. impact on carers) to a greater extent,
something that the current system is failing to do. Furthermore, while NICE would be the key source of advice on the
relative cost-effectiveness of new medicines and the first body to analyze a product's pharmacoeconomic proposition, other
aspects of value are expected to be taken into consideration for reimbursement decisions, with additional weightings
decided upon by expert panels. As a result, while NICE will still carry out the cost-effectiveness evaluation of new drugs, it
will no longer be able to ban use of drugs on the NHS, instead largely having an advisory role, although the exact details of
this (beyond advising clinicians on most effective treatments and quality standards) are set to be determined at a later date.
Nevertheless, it is still expected to be central to the UK’s drug access route.
Overall, the system does seem to imply the use of pricing and reimbursement negotiations between the Department of
Health and drug manufacturers, similar to the new price negotiation requirement introduced only recently in Germany,
although manufacturers would retain some pricing freedom. For example, if a manufacturer were to propose a price below
the basic threshold, it would be accepted by the NHS. If it were above, however, then the manufacturer would need to
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provide evidence showing that the drug deserves a higher weighting in terms of disease burden, therapeutic innovation,
and improvement or wider societal benefit that would be reviewed by a panel of experts. For medicines that have
insufficient support for their value proposition at the time of launch, a flexible approach is envisaged, with the price set
according to data available at the initial evaluation. This could then later be adjusted if better evidence becomes available.
However, this implies potentially lower launch prices, with companies facing uncertainty over the possibility of increasing
the price at a later date.
While the proposals have so far been met with industry approval, the proof will be in the final guidelines and their
implementation in practice. The industry is hoping for a transparent and consistent approach developed with industry
engagement. However, many concerns remain, especially regarding rewards for incremental innovation, and the fact that
according to the Association of the British Pharmaceutical Industry (ABPI), value-based pricing has not been successfully
implemented in any country. The ABPI is engaged in talks with the health minister, Lord Howe, in order to secure a good
deal for pharma and for patients (Adams, 2010).
One key issue will be how high or low the new basic threshold will be and how much that can be increased through the
different weightings. The general expectation is that me-too drugs will be punished and discouraged through significantly
lower thresholds, while innovative treatments will be rewarded. However, with the NHS currently facing real-term cuts (or at
least no growth in the near term), there is a question of where the funds for expensive drugs will be found and whether the
UK will indeed become a more lucrative market for expensive therapies. Furthermore, with NICE still holding the reins in
terms of cost-effectiveness evaluation, whether the new system will bring any real change is questionable. It is likely that
value-based pricing will present a more strict system compared to the current PPRS and is therefore an unwelcome (if
inevitable) outcome for the pharma industry. Moreover, considering that UK drug prices are widely used as a reference by
other countries, a move towards value-based pricing would have far-reaching implications for pharma manufacturers, well
beyond the UK.
Price negotiation may not be a complete novelty in the UK, since this is required in risk-sharing schemes These schemes
would, however, be scrapped under new proposals, prompting industry fears that negotiated discounts (when rebates are
taken into account) will impact other markets that use the UK as a reference.
In summary, the details of how the new value-based pricing system will work are yet to be clarified. However, confusion will
be compounded by the parallel NHS reforms that will fragment reimbursement decision-making on a regional basis. In the
future, pharma may find itself having not only to negotiate the price for the UK market, but also with potentially hundreds of
stakeholders with respect to reimbursement decisions and additional discounts or rebates.
Germany introduces drug price negotiation
Germany is now subject to new price negotiation arrangements. The second part of the Entwurf des Gesetzes zur
Neuordnung des Arzneimittelmarktes (AMNOG) law, passed in November 2010, introduced a requirement for price
negotiation for newly launched drugs from January 2011. As a result, innovative drugs are subject to benefit assessments
and price negotiations with public health insurers; the reference pricing system now includes me-too drugs, and drugs
included in the reference pricing system will be increasingly targeted with discounted contracts (IHS, 2010c, Bruce, 2010f).
These changes are expected to lead to €2.0bn ($2.7bn) in savings per year (IHS, 2010d).
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© Datamonitor. This report is a licensed product and is not to be photocopied Page 89
Furthermore, pharmaceutical manufacturers now have to provide a report on the additional benefits of their drugs
compared to existing therapies (mainly cost-effectiveness data from Phase III clinical studies), in addition to an estimation
of how many patients would benefit from the drug. Specifically, the manufacturer must provide information on (The Pink
Sheet, 2011):
• the authorized indications
• the actual medical benefit of the product
• the additional medical benefit of the product compared with existing therapies
• the relevant number of patients and patient groups for the product is
• the price that statutory health insurance funds will have to pay for the treatment
• requirements for ensuring the product is used in a way that ensures quality
The data must be provided by the time the product is launched (The Pink Sheet, 2011). Manufacturers have pricing
freedom for a maximum of 1 year, after which the negotiated price will be used. If the negotiations fail, an arbitration price
will be used. All new medicines will be affected, while already marketed drugs will be added to the system gradually over a
number of years (Bruce, 2010g).
As a result of the new law, pharma companies now have to be prepared to negotiate with Germany’s key regulatory body,
the Federal Joint Committee (Gemeinsamer Bundesausschuss; G-BA), or risk having a low ceiling price that would affect
prices in other markets through reference pricing. In addition, as pharma companies are only able to freely price their
products for a maximum of 1 year following market authorization, this incentivizes them to launch immediately following
approval before the drug’s price may be reduced through negotiations and rebates. Companies will also be under pressure
to submit to insurers during negotiations, otherwise the arbitration committee will set the price according to the European
average price, a move which will bring the price down. Furthermore, unless a drug is proven to have a significantly better
cost-effectiveness ratio through the Institute for Quality and Efficiency in Healthcare's (Institut für Qualität und
Wirtschaftlichkeit im Gesundheitswesen; IQWiG) assessment, there will be little incentive for insurers to allow a higher drug
price than that set by the arbitration committee (Kifmann and Neelsen, 2010).
As a result of the new price negotiation process, Germany may lose its status of typically being the first EU market in which
drugs are launched. Me-too drugs will be particularly affected since they may be assigned to reference price groups if they
fail to demonstrate any additional benefit to existing drugs. In addition, price setting under the new law could impact drug
prices in markets referencing Germany, namely Austria, Belgium, Canada, Finland, France, Greece, Hungary, Ireland,
Israel, Italy, Japan, Luxembourg, the Netherlands, Norway, Slovakia, Slovenia, South Korea, Switzerland, and Taiwan
(IHS, 2010b).
Pharmaceutical manufacturers in Germany may find themselves in a similar position to those in the UK, having to decide
whether to forego applying for reimbursement status of certain medicines in order to maintain a higher price in other
markets. However, taking into consideration the size of the German pharmaceutical market, it is unlikely that companies will
decide to take this option.
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© Datamonitor. This report is a licensed product and is not to be photocopied Page 103
APPENDIX
Exchange rates used in this report
Table 6 summarizes the currency exchange rates used in this report.
Table 6: Currency exchange rates, 2011
Country Currency Dollars per national currency unit, 2010
US $ 1
Australia A$ 0.9184
UK £ 1.5453
EU € 1.3267
Source: www.oanda.com D A T A M O N I T O R
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